The shadow price of assimilative capacity in optimal flow pollution control

Article history: Received 22 December 2007 Received in revised form 15 November 2008 Accepted 15 November 2008 Available online 29 December 2008 We present a model of optimal flow pollution control considering explicitly the dynamics of the corresponding assimilative capacity. We focus first on the degradation of this assimilative capacity triggered by pollution excesses and determine the intertemporal efficient pollution path, taking into account this ecological feedback. Our analysis shows that a minimum level of initial assimilative capacity is necessary to prevent its optimal extinction. We then allow for the restoration of assimilative capacity and characterize the conditions under which this option frees the optimal policy from the dependency on the initial conditions. In both cases our results call for environmental standards based on the shadow price of assimilative capacity that are stricter than the static optimum commonly used in flow pollution control. © 2008 Elsevier B.V. All rights reserved.