The Optimal Management of Environmental Quality with Stock and Flow Controls

48 Pages Posted: 16 Jul 2005

See all articles by Nathaniel O. Keohane

Nathaniel O. Keohane

Yale University - School of Management

Benjamin Van Roy

Stanford University - Department of Management Science & Engineering

Richard J. Zeckhauser

Harvard University - Harvard Kennedy School (HKS); National Bureau of Economic Research (NBER)

Abstract

We characterize environmental quality as a stock, and its rate of deterioration as a flow. We consider a class of problems, which we call "SFQ" problems, in which both stocks and flows can be controlled to promote the quality of a resource stock. Abatement (curbing the flow) and restoration (restoring the stock) are interdependent tools in such problems. Under the optimal policy, periodic restoration complements positive but variable abatement that partly stems the quality decline. The preferred balance between the two strategies depends on environmental and economic factors. If flows are low enough, or if abatement is sufficiently inexpensive relative to restoration, optimal abatement may be sufficiently intense to offset the expected deterioration and produce an equilibrium in expectation. When deterioration is more rapid or more variable, when abatement is more expensive, or when restoration is less costly, the optimal policy relies more on restoration. We apply the analysis to the restoration of an endangered species, and show how it could illuminate a range of other problems in the environmental arena. But the lessons are general, and we briefly discuss how they apply to the management of both physical and human capital stocks.

Keywords: Economics - Economic and Econometric Theory, Economics - Microeconomics, Environment and Natural Resources, Regulation

JEL Classification: C61, Q20, Q50

Suggested Citation

Keohane, Nathaniel O. and Van Roy, Benjamin and Zeckhauser, Richard J., The Optimal Management of Environmental Quality with Stock and Flow Controls. KSG Working Paper No. RWP05-042, AEI-Brookings Joint Center Working Paper No. 05-09, Available at SSRN: https://ssrn.com/abstract=757353 or http://dx.doi.org/10.2139/ssrn.757353

Nathaniel O. Keohane

Yale University - School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

Benjamin Van Roy

Stanford University - Department of Management Science & Engineering ( email )

473 Via Ortega
Stanford, CA 94305-9025
United States

Richard J. Zeckhauser (Contact Author)

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States
617-495-1174 (Phone)
617-384-9340 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States
617-495-1174 (Phone)
617-496-3783 (Fax)

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