Control of Accumulating Stock Pollution by Heterogeneous Producers

Activities by heterogeneous producers are the cause of a wide range of en-vironmental problems where environmental quality depends on an aggregate pollution stock that accumulates over time. The stock of pollution can be re-duced by changing production practices or by removing pollutants after they are generated. In this paper we analyze the optimal combination of source control and abatement strategies over time. The source control is given by the input use and the technology choice for each unit. The results show that that the optimal intertemporal policy depends on the form of abatement cost and damage functions and that input taxes need to be complemented by tech-nology taxes or subsidies to establish the socially optimal outcome. Finally, the paper presents a novel approach for solving spatial-intertemporal optimal control problem- the so called two stage solution approach