In this paper we will investigate transitions of firms that areconfronted with a deadline for compliance with quantity-basedenvironmental regulation, i.e. Command-and-Control. Our typicalfirm uses capital and labor as inputs in the production of goods,and pollution is generated by the use of capital.The firm has two types of productive capital at its disposal,a cheap and dirty type and a clean but more expensive type, andmoreover it has the opportunity to abate pollutants by means ofend-of-line abatement capital goods. The transition from an ex antesteady state where regulation is absent, to an ex post steadystate in which environmental standards are incorporated exhibits thefollowing phenomena: First, the firm will face a period of partialshutdown, the shorter the anticipation period the more severe andpersistent this will be. Second, for relatively short periods ofanticipation the firm will overinvest in end-of-line abatementcapital in the sense that it overshoots its long-run optimal level.The losses incurred during the transition substantially exceed`back-of-the-envelope' estimates based on steady state-analysis.We investigate alleviating effects of subsidizing different typesof capital in conjunction with anticipation time. Apart from theirlump-sum value subsidies do not reduce the losses substantially,whereas timely announcement does.
# 97-046/3 (1997-05-21)
- Jan Peter Kooiman, University of Amsterdam