Accumulative pollution, "clean technology," and policy design

This paper addresses the optimal long-term management of an accumulative bu t assimilable pollutant through economic incentive policies that restrict m ore damaging production processes and induce more benign alternatives. Usin g a simple general equilibrium approach, we consider the possibility that t he assimilative capacity of the environment is eventually exhausted by poll ution accumulation. In this case, there is a nonconvexity in the problem th at gives rise to multiple potential optima; environmental quality may be pr eserved or completely degraded in the long term. We characterize the circum stances under which phasing out dirty production is consistent with an inte rtemporally optimizing path and we discuss the design of price-based and qu antity-based policies for supporting an optimal solution with the nonconvex ity. (C) 2000 Elsevier Science B.V. Ail rights reserved. JEL classification : Q20; Q28; D62.