EFFECTS OF POLLUTION RESTRICTIONS ON DYNAMIC INVESTMENT POLICY OF A FIRM

The purpose of this paper is to determine the effects of different pol lution standards on the firm's resource allocation decisions. To do so , a dynamic model of the firm is developed in which it is assumed that production causes pollution as an inevitable byproduct. Concerning it s investment policy, we suppose that the firm can choose between inves ting in productive capital goods and investing in abatement efforts. I t is shown that, in some cases, future abatement expenses have a negat ive impact on the present level of productive investment, even if the pollution standard is not binding at the moment. This implies a really dynamic optimal investment policy for the firm, which cannot be obtai ned within a comparative static analysis.