Avoiding an ecological regime shift is sound economic policy

We extend the shallow lake model by adding the capital stock of an industry. A government can mitigate the effects of pollution arising from industrial activities by imposing the requirement to abate emissions. Within this framework two scenarios are examined: in the social optimal benchmark, the social planner optimally allocates investment. In the competitive equilibrium, market forces determine the investment in capital, but the government can still abate emissions. We find that irreversible environmental regime shifts are avoided in the competitive equilibrium by means of a static level of abatement when it is socially optimal to do so. (C) 2013 Elsevier B.V. All rights reserved.