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Pollution control and the Ramsey problem

van der Ploeg, F.; Withagen, C.A.A.M.

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1991

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van der Ploeg, F., & Withagen, C. A. A. M. (1991). Pollution control and the Ramsey problem. (Reprint series /
CentER for Economic Research; Vol. 49). Unknown Publisher.

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Pollution Control and

the Ramsey Problem

by
Frederick van der Ploeg
and
Cees Withagen

Reprinted with permission from Kluwer

Academic Publishers from Environmental and
Resource Economics, Vol. 1, No. 2, 1991

Repri nt Series
no. 49
CENTER FOR ECONOMIC RESEARCR

Research Staff

Relmut Rester
Eric van Damme
Frederick vaii der Ploeg

Board
tlelmut Bester
Eric van Damme, director
Arie Kapteyn
Frederick van der Ploeg

Scientific Councíl

Eduard Bomhoff Erasmus University Rotterdam

Willem Ruiter Yale University
Jacques Drèze Université Catholique de Louvain
Theo van de Klundert Tilburg University
Simon Kuipers Croningen University
Jean-Jacques Laffont Université des Sciences Sociales de Toulouse
Merton Fliller University of Chicago
Stephen Nickell University of Oxford
Pieter Ruys Ti.lburg University
Jacques Sijben Tilburg University

Residential Fellows

Joseph Greenberg McGill University

Jan Magnus Tilburg University
Emmanuel Petrakis University of California at Los Angeles
Larry Samuelson University of Wisconsin
Jonat.han Thomas University of Warwick

Doctoral Students

Roel Beetsma
Hans Bloemen
Chuangyin Dang
Frank de Jong
Pieter Kop Jansen

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ISSN 0924-7874

1991
 ~

Pollution Control and

the Ramsey Problem

by
Frederick van der Ploeg
and
Cees Withagen

Reprinted with permission from Kluwer

Academic Publishers from Environmental and
Resource Economics, Vol. 1, No. 2, 1991

Reprint Series
no. 49
Pollution Control and the Ramsey Problem
FREDERICK VAN DER I'LOEG
( c~Ure jor Lconomic Rescurrh, Tilburb Unicersi(y~, I'.O. Rox 9UlS.~, ?(X11pl.E 7ilhurg,
77~c A'e~herlctntls.

s~ncl

CEES WITHAGEN
I)epnrrmeiu ojAlarhemnric.c nnd Compcnin~ Science, U~iic~ersiry ojTechrwlo~~, I'.O. IJox SLi,
i(~(XJ a11i Eirrdlrnven, 7he Ncnc~rlu~cds.

Abslract. Pollutiun is an inrvitable hy-pnxluct of production and is only graJually dissolved

hy thr environment. It can he reduced by pnxiucing less and by cleaning up the environment,
hut ncithrr occur when they are left tu the market. Cleaning activilies and the optimal
emissiun charges incrcase with the uock uf pullwants. When one allows (or txillution of the
envirunmcnt in the classical Ramsey problem, the capital stock is less than in the markel
uulcume and rr jorriori less Ihan undcr the golden rulc. The analysis distinguishes between
auck and Ilow externalities arising from pullwion. An increase in impaliencc can lead to more
rapital accumulatiun, cven though this leave. less roum tor current consumption.

Key NurJs. Pullution contrul, ahatement activities, capital accumulation, Ramsey model.

1. Inlruduction
Pollution is an inevitable by-prodact of production, which damages the
cnvironment and is only gradually dissolved. Since there arc no private
markets for pullution ri~hts, market outcomes are inefficient and give rise to
too much productiun and pollution (e.g., Dasgupta, 191i2). The four standard
approaches to environmental policy are property rights, binding yuota
restrictions, Pigouvian taxes and subsidies, and markets for pollution permits.
Thc problem with property rights is that théy are dif[icult to define, since
many pollution and environmental problems are characterised hy the prob-
Iem of the common. The problem with quotas is that emission standards are
clifficult to enforce and lead to high administrative costs, whilst the difficulty
with emission charges and pennits is that they only apply in well-behaved
siluations without non-c~m ~~~~ies. The present paper focuses, ncvertheless,
un optimal cmission char~;c~, in the context of a dynamic pullution problem
cmhrdded in the Ramscy model. Since pollution is cssentially a problem of
missing markets, the emission charges correspond ro the social price of an
aclditional unit of pollution.
Section 2 considers pollution control when waste is a by-product of
production. Distinction is made behveen the sorial costs of both the Ilow and
thc stock of pollutants. The market outcome and the socially optimal
outcume are compared. L3ecause in the absence of government intervention
therc will be too much pollution and not enough abatemcnt activities,

lin~'iruitntciucrlurulllrsoacrcrF.corromirs 1:215-23ri, 1991.

O I N91 Khcu~cr Acnclcmic I'rcblishen. PriNCCI in !he Ntlherlunds.
216 F. vun di~r I'lueg u~~d C. Whhagc~i

Pigouvian tax and subsidy schemes can lx used to sustain the socially
optimal outcome in a decentralised market economy. Section 3 reviews the
Ramsey problem of optimal consumptiun and capital accumulation and
thereby sets the scene for later sections. Section 4 discusses' huw environ-
mental stock and flow externalities can be added to the Ramsey framework
and discusses previous work in this area. Sections 5 and 6 focus on Pigouvian
tax and subsidy scltemes and show how they can be used to correct fur
environmental flow and stock externalities in the Ramsey problem. Section 7
discusses the socially optimal level of abatement activities within the context
of a Ramsey model with social costs associated with a stock of waste
products. It is then possible that more impatience leads to more capitul
accumulation, despite the fact that this leaves less room for current private
cunsumption. Section 8 analyses why the market invests too little in elean
technology and Section 9 briefly considers the implications for environ-
mental policy when renewable resources are used as factors of production.
Section 10 concludes the paper.

2. Pollutiun Cuntrol
It is assumed for the time being, that there is nu investment in physical
capital; later sections relax this assumption. Consumption, C is thus produc-
tion of goods, Y, minus the amount of output that is used to clean up the
environment, A. Production is limited by the availability of given factors of
production, so Y 5 Ym;,,,. Net social benefits of consumption are given by
B(C), B' 1 0, and marginal benefits are decreasing in the level of consump-
tion, B' C 0. One reason may be that as a society consumes more, it needs
to produce more and thus needs to wurk harder and I'orego morc leisure in
urder to secure an additional unit of consumption. To rule uut non-positivc
Icvels of consumption, it is ussumed that B'(0) g~. Pollution is an
incvitable by-product of productiun, a Y, where a~ 0 denotes thc emission-
uutput ratio. The emission-uutput ratio can bc improved by investmcnt in
new technology, but this will bc ignurcd fur the time being (sc:e Scction 2i).
The stock of pollutants, S, follows from
S- a Y- a(A)S, S(l)) a S~„ given, (2. I)
wherc a(A) ~ l) d~notcs the ratc at which pullutants are dissulved by th~
envirunment. Thcrc is an amuunt A of tutal pruduction Y devotctJ tu
clcaning-up activitics. Thc ratc at which pullutants arc dissolved is highcr
whcn mure efforts arc macle to clean up the cnvironment, o' ~ 0. Rcturns tu
such ctfurts are diminishin~, a" C l). Pullutants such as DDT dissulve vcry
sluw~ly, whilst herhicidcs dissulve yuilc yuickly.
The sociul w~lfarc I'unctiun is givcn by

Iv ~ J ' exp(-6r)~B(Y-A)- l~r(aY)- U,(S)I dr, (2.2)

Nolluiio~r C7iiurol und rhe Riur~sev Prublem 217

where 9 ~O denotes the social rate of discount, Dt(aY) (with DÉ ~ 0 for

a Y~() and Dt((1) - 0) denotes the social damage caused by the flow of
pollution ( e.g. due to noise) and Dti.(S) with (Dí,- ~ 0 for S~ 0 and
D',(0) - 0) denotes the social damage caused by the stock of pollutants (e.g.
due to the stock of SO, in air). Pollutants often display threshold effects; for
example, below a certain level of smog trees survive, but above this level
irecs do not survive. This leads to non-convexities and means that it is
diffïcult to rely on Pigouvian taxes and subsidies in the design of environ-
mental policy. Here it is assumed that the marginal damage increases with the
stock of pollutants, so that the damage functions are convex, DF, DS 3 0.
The following conditions must be satisfied for optimal social welfare:

B'( Y- A)- a](D É( a Y) f r] - a'(A)Sr (2.3)

D.,(S) - a(A)r ~- i - 9r (2.4)

where r denotes the optimal emission charge per unit of pollution, a Y. The
second equality of (2.3) holds only if A ~ 0; if D~.(.) - 0 then it is optimal to
have A- s- 0 and the second eyuality of ( 2.3) is replaced by a greater
than inequality. The shadow price ( co-state) associated with the stock of
pollutants corresponds to -r, because the concentration level of pollutants is
a stock with a negative social value. Equation ( 2.3) demands that the
marginal social benefits of consumption should equal the marginal flow plus
stock damage to the environment due to consumption.
In the absence of any stock damage, D,~. á 0, emission charges are zero,
r- 0, so that the marginal social benefits must equal marginal social flow
damage, 13'(C) - aDF(aY) giving rise to C- C'. The market outcome,
however, corresponds to a maximum level of production and consumption,
C" ~ Y~" - Ym,;. Since the market does not internalise the externality to
consumers associated with pollution arising from production, the levels of
pn~cluction and consumption are too high (see Figure I). The socially
optimal outcome can be sustained by levying a consumption tax at a rate
equal to aU;(aC') and redistributing the revenues in a lump-sum fashion.
Alternatively, it can be sustained by levying a pollution tax equal to DF(aC')
per unit of emitted pollutants.
Now consider stock externalities and, for the time being, assume that the
r:ite :n which pollutants are dissolved is constant ( A - constant). In that case
equation ( 2.3) can be solvcd to give

Y - Y(A, r) (2.5)

~vhere Y, -!3"I(!3" - a'D~ )~ Q and Y, - aI(B" - a2D f-) C 0. Hence,

the optimal level of production and thus of pollution increases when efforts
are made to clean up the environment and when the social cost of ihe stock
uf pollutants decreases, for example as a consequence of less concern with
stock damage.
2Ió F. vun drr I'lorg cutd C'. Wilhu~en

ll'

1
('~ ~~AI
C
Fig. 1. Markel and social outcumes in lhc prescnce uf tluw cxtcrnalities unly.

Alternatively, when efforts to clean up the environment are endogenous,

cyuation (2.3) can be solved to ~;ive
~-1 ~ ~I ( r. S), 1' ~)'( r, J) ('.t~)

where A1 -(LT"Y~ - a'S)I~a'Sr f B"(1 - Y„)~, A, a-a'r~~U"ST ~-

B"(1 - Y,c)~ ~ 0, YT - Y~Ar t Yr and Y,. - YAA, ~ 0. When thc stock of
pollutants increases, the efforts to clean up the environment increase and
ccteris paribus one can afford to have a higher level of productiun. The
effects of a decrease in the social cost of the stock uf pollutants on the levcl
of production and efforts to clean up the environment are ambiguous: thc
Jirect effect is for the level of production to increase, the marginal benefit of
consumption to fall and thus the level of cleaning-up activities tu increase,
but the indirect effect is to recluce the social need for cleaning-up activities su
that these efforts are reduced. Which way it goes is part of the olcJ-agc
dispute in environmental discussions! The optimists say productiun must gu
up in order to be able to afford to cl~an up the environmcnt, whilst thc
pcssimists argue that production must gu down, et~en if this Icavcs Icss scopc
lor cleaning-up activities, as pollution as a by-product of procJurtiun domi-
natcs all else. This dispute can unly be settled by empirical cviticncc. If thcrc
are no fluw externalities (D~ z l)) present, then a a a'.S', Y,, a I, Y, ~ Y, ~
u~l~" C 0, A, - 0 ancl A, a-a"Ia"S. An incrcase in thc; social cust uf
pullutants cioes not affec[ clcaning-up activities, A~ ~ 0, bccause thr:
emission-output ratio (a) eyuals the marginal increase in dcpreciation arising
 Pollunon Con~ro! and die Krurisey 1'roGlem 2l9

from cleaning-up activities. Production Y does decrease, Y~ C 0, giving

support to the camp of pcssimists.
Equation (2.4) says that in equilibrium the social rate of return on the
stock of pollutants, i.e., the marginal social damage minus the rate of
ciepreciation plus the expected capital losses, should equal the social rate of
discount. This, of course, resembles the arbitrage equation (amiliar from, for
example, Hotelling's theory of exhaustible resource depletion.
The dynamics of the stock of pollutants and the optimal emission charge
arc bivcn by:

S a aY(r, S) - a(A(T, S))S, S(0) - S„ (2.7)

i~[9 ~- a(A(r, S))[t - D~.(S). (2.8)

The phase diagram for the case that cleaning-up activitics and thus deprecia-
tion are exogenous is presented in Figure 2. The S- 0-locus slopes down-
wards, because a higher stock of pollutants must be caused by a higher level
of production induced by a lower level of the optimal emission charge. The
i- 0-locus slopes upwards, because an increase in the stock of pollutants
increases the marginal damage caused to the environment and thus requires a
higher emission charge. The equilibrium is at the intersection of these two
loci,' whilst the transient behaviour is described by saddlepoint dynamics. A
f~tll in the emission-output ratio shifts the S- 0-locus down and thus moves
the equilibrium from E to E'. On impact the optimal emission charge and
level of production drop immediately ( move from E to A) and subsequently

J
r
.5'-u

S'
FiE.'. fmissicm charges and stock of txillutants in the presencr of stock externalities
(a(~1) ~ a).
zzo F. ,~cu, drr Plurg iu,d C. Wrdwgrn

they are further reduced until the stock of pollutants has fallen to its new
cyuilibrium value ( move from A to E' along the new saddlepath S'S'). On
the other hand, an increase in the social rate of discount ( or th~ government's
pure rate of time preference) shifts the i- U-locus duwn and thus moves tlte
equilibrium from E to E'. As a result of this increase itt impatience, the
stock of pollutants increases and the optimal emission charge falls. A
subsequent exogenous increase in efforts to clean up tlie environment shifts
the equilibrium from E' to E'. The impact effect corresponds to a mov~
from E" to B, whilst the transient effect corresponds to a move frum B to
E'
An important issue is what are the appropriate Pigouvian taxcs to sustain
sucially optimal behaviuur as a decentralised market uutcome. Since thcrc
are two externalities (flow and stock), it is sensible to have two taxes: onc un
gross emissions (t~,) as they affect the flow and one on net emissions (t~.) as
they affect the stock of pollutants. In a decentralised market economy firms
maximise (taking T~;, TN and S as given) B( Y- A) - T~;a Y- rh.~a Y-
a(A)S~, which gives the social optimum pruvided r~; - DÉ(aY) and t.,~. ~ r.
Alternatively, gross emissions are taxed at the rate r~; f TN, and cleaning the
environment is subsidised at the rate rN. Provided the activity of cleaning up
the environment (A ) can be decentralised, only two Pigouvian taxcs arc
needed to sustain the first-best outcome. Any excess revcnues shuuld be
redistributed in a lump-sum fashion to the private sector.

3. The Rantsey Problem

The foltowing sections discuss Ramsey problems with pullutiun. In order to
have a benchmark, this section first gives a bird eye's view of thc Ramscy
problem. A more detailed treatment may be found in Blanchard and Fischer
(1989).
Ramsey's model is the classic framework for studying the uptimal intcr-
temporal allocatiun of resources. Preferences of thc infinitcly-liveel reprrscn-
tative family (or dynasty) are equal tu

W ~
J ~~
exp~-8r~8(C(r)) dr (3.11

~~h~re B is a constant' and C(r) dcnutes per-capita privatr cun,umptiun at

time l. Pruduction is charactcrised by cunstant rcturns to scale. Pcr-r:rpita
output, Y, is given hy the intensive-furm production fwictiun, J(l~ ), J" ~ U,
J~" C(l, f(U) - 0, f'(U) ~~, f'(ao) 3( l where l~ dcnutrs thc prr-capila
capital stock. Since output is either cunsumed or inve,tcd, unc has

~ - I(~ ) - c - (b t „)~, ti (u) 3 h,,. (-~.?I

where rr denotes the exugenous growth rate of labuur supply an~l J ~lenutr,
Polhniuii (~onlr~il and rhe R~irn~ri~ I'rublcm 22 I

the rate of physical depreciatiun of the capital stock. Alternatively, income is

cithcr saved (in the only asset that is available in this econumy) or cunsumed.
Because there are no externalities whatsoever, the fundamental thcurem uf
welfare economics says that the market outcome is socially optimal and thus
corresponds to Ihe command optimum. The social planner maximises (3.1)
subject to (3.2). This yields the famous Keynes-Ramsey rule

c - ~f'(x)- o-,r - a~r~(c)c, (~.3)

where ,~ -- ~3'~(Cl3") ~ 0 denotes the instantaneous elasticity of inter-
temporal substitutiun, and the transversality condition

lim (K(~)[3'(C(t))exp(-et)j - 0. (3.4)

,-m
Equation ( 3.3) is nothing more than the continuous-time efficicncy statement
that the marginal rate of substitutiun between consumptiun at two poínts of
timc should eyual the marginal rate of transformation. In a market economy
lirms maximise profits and set the marginal product of capital tu the user
cost of capital, i.e., f'(K) - r-~ a where r denotes Ihe murket rate of
interest. Similarly, families maximise the discounted value of life-time con-
swnption, ( 3.1), subject to their intertemporal budget constraint, which yields
the "tilt" C-(r -,r - B)qC and consumption as the propensity to consume
timcs the sum of human wealth plus nun-human wealth. Hence, when the
market rate of interest, r, exceeds the pure rate of time preference, 9 f n,
society prefers to save and defer consumption and thus consumption
increases over time. Conversely, if r C 9 f ,r, consumption falls over time.
Thc highcr the elasticity of substitution, r~, the easicr it is tu suhstitute
prescnt consumption for future consumption and vice versa. For the case uf a
constant coefficient of relative risk aversion, ~3, one has !3(C) - C' -~r~( I-
J3), ~3 ~O, ~3 ~ I, !3(C) - log(C), f3 - I, and then r~ -( II~3) corresponds
to the instantaneous elasticity of intertemporal substitution.
A suhstantial literature cxists on golden rules uf ecunomic growth (e.g.
Phrlps, 196G). The condition that maximises the lon~-run level of pcr-capita
consumption is called the golden rule. This is f(K) ~ n f b and yields
K`~ ~~(n f a), ~' G 0. The condition that ensures a steady per-capita ratc
of cunsumption is called the modified golden rule. It is given by f(K) -
,r -F á f B and yiclds K"`' -~(n f a~- 9) C K`', so that the capital stuck
is reduced hclow the goldrn rule Ievcl due to thr impaticnce of socicty. The
stcady-state market rcal rate of interest, r(~) ~ n -f B, is thus detennined by
tastes alune, whilst technulogy then drtcrmines thc steady-state stock of
capital, uutput and consumplion. The phase ~liagram assuciated with equa-
tiuns (3.?)-(?.3) is prcscnted in Figw-c 3.
Thc ccluilihrium F. is thc i~nly stc.rdy statc that sali~fics the uptimality
conditiuns and that is also saddlcpiiint stahle.
2?2 F: wn dcr Ploeg ui~d C Will~ugeit

C-Q

L -~
!~ erc k'

Fig. 3. The muJilied GulJen Rulc.

4. Environment and the Ramscy Problem

Here capital is incorporated intu the moclel of Scctiun 2 or, alternatively,
environmental issues are incorporated into the moclel of Section 3. The sucial
welfare function is given hy

Lv ~
J m~ exp(-BI)~R(C')-Dr(aÏ(K))-D,(S)I dl. (4.1)

"I~hc guvernment maximises this welfare functiun suhject to

K a!(ti )- bti - C- A, ti( U) a K~~ givcn, (~.')

S a af(K) - a(A)S. S(U) ~ S~~ given. (-f.3)

For simplicity, it has bren assumed that there is nu pupulatiun ~ruwth (rr -
O). This is a control problem with two state variables. It is well known th~t
such problems are har~ to sulvc analytically. Howevcr, duc tu the special
character of this particular problcm, a good eJcal ran hc saicl abuut th~
sulution. I3efore prucce~ing, it is wurthwhile tu cumpare thc present
appro;ich with prcviuus appruachcs which ~eal with capital accumulatiun an~l
the envirunnirnt simultaneuusly. Thc first refercncc is probably Kcclcr,
Spence, anJ Leckhauser ( I~17 I) who u~e a nw~cl whcrc uutput clcpcn~s
thruugh a neoclassical procluction function un thc capital stock ancl is
l4rllwirrn ('nrurrrl unrl ~lre Kunr~r~r l7~rhlr'nr 223

,rllucatcd tu cithcr consumptiun, invcstmcttl ur rcclucliun of thc cmission-

ocuput ratio. Only thc stock of pollutants affccts wclfarc in this classical
stucly. Thc control variahlcs arc thc proportions of output devutcd to
conwmption and clcan tcrhnolugy. A uniyuc steady state is shown to exist
with cithcr nu atlcmpt to lowrr cmission-output ratio (Modificd Goldcn Age)
cir wilh a pusilivc share of oulput devotcd lo cleaner technoloby (Murky
A~c). "l~his study docs not discuss abatcmcnt activilics. Forstcr (1973) and
Gruvcr ( I y76) ulso look at pollution and optimal rrpital accumulation, but
thcy only considcr thc effects of lhe tlow iif pollution on welfare. An
important tcxt is M~ilcr ( I c)74); Ch.rptcr 3 is particularly rclcvant. Thc major
cliffercnccs with the present model are that M:ilcr does not allow for
ahatement activities, that pollution is rwsed by consumption rather than by
procluction and that total production ovcr time is bounded by the limited
availahility of an cxhaustihle resource. Becker (19H2) works alonb the lines
ot Brock's (1977) modcl of capital accumulation and cnvironmental quality.
lie clocs not allow fur ahatement activities either. In his model there is joint
production, so that output of goods is given hy the production frontier Y a
F(K, "L), 1:,,, F~ ~O, wherc Z denotes the waste generated by production.
This allows for suhstilution possibilities between thc capital stock and the
cmission of rubbish when one produces. a given amount of output. A~ a
conseyuencc the development of the stock of waste products, S, is given by
.S ~"L - a.S. Finally, Becker uses the maximin criterion for social welfare.
He shows that an increase in the rate of time preference can lead to a higher
stc.rcly-statc capital stock and a lower level of pollution, even though this
woulcl Icave Icss room for private consumption. This result saunds counter-
intuitivc, because normally one expects that less concern for Future benera-
tions leads to more pollution. The difference with a recent paper by Musu
(19t{9) lies in the fact that in Musu's model capital can be used for produc-
tion and abatcment and can instantancously be transferred from one activity
to anothcr. None of these aulhors take account of a direct effect of the flow
of pollution on welfare. All uf them establish the existence of a steady state
which is shown to bc locally asymptotically stable and of which the compara-
tivc st.rtics arc analysed. The work of Tahvonen (1990) should be mentioned
hcrc ati wcll, bc it that he pays almost exclusive attention to the harvesting of
a rcncwahlc resource in conncction with pollution control. Tahvoncn and
Kuuluvainen (199(1) providc a vcry interesting analysis of a model with
,rcrumufation uf capital and of waste products very similar to the present
unc. Thc main difference is that attention is focused on substitution
pussibilities hetwcen capital and the generation of waste products when
hroducin~ a givcn amount of oulput, although lhe use of resources fur
ahatcmcnt activitics is ignorccl.
In orcler to kecp thc analysis managcable, a distinction is made here
hrtwcen the casr where thcrc is only tlow damage and the casc where there
iti only stork dama4c arisin~ from pollution.
224 I-: rrur rlrr I'lurg rurd C. Widrugcrr

5. Flow Externalities and the Ramsey Problcm

This section assumes that there is no detrimental effect of the stock of
pollutants on welfare (D,(S) ~ 0). Then, obviously, there is no case for
pollution abatement, so that A- 0. Since there are no social custs assuciated
wi:h the stock of pollutants, the problem of maximising (4.1) subject to
equations (4.2)-(4.3) is relatively easy to solve.
Individual households are too small to care abuut pollution as a by-
product of production but the social planner dces internalise such fluw
externalities. It is clear that the fundamental theorem of welfare economics
no longer holds. The best line of attack seems to characterise the socially
optimal outcome, contrast it with the market outcome discussed in Section 3,
and show what kind of scheme of Pigouvian taxes and subsidies ensures that
the market produces a socially optimal outcome.
The Iransversality condition (3.4) is unaffected, but the Keynes-Ramsey
rule is modified as folluws:
C'~ f"(K) I1 - aDr(aÍ(K))~B"(C)~ - B- á~ r~(C)C (5.1)
Fígure 4 shows how the modiGed golden rule is affected by tlow externalities
arising from pollution. The C -()-lucus is given by

aDf(af(K))Ï~(K) 1
B'(C) -
f'(K)-á-B 1 (5.2)

and requires that the marginal social benefit of an additional unit of private
consumption equals the marginal damage to the environment arising from the
additional production required to satisfy consumption. The C - 0-locus can
~asily be shown to be downward-sloping and to go through the puint C- U,
K- K"`'. Hence, the phase diagram is as in Figure 4, rathcr than Figure 3. It
is easy to see that the stcady-state stock of capital is smaller than thc one
under the modified golden rule, because aDtlt3' 1 0 and thus frum
eyuation (5.2) r~ B. The steady state is given by point E'.
It is also instructive to consider the C ~ 0-locus in r- K space. It is givcn
by

r~ R ( K ) - áaDr(al~(K)) f ~e'(I'(K )- áK )
B'(f(K) - áK ) - aUt(af(K )) ~~ (-5.3 )

This lucus starts at Iz(0) z ~ and can easily bc shown to bc upward-sloping.

"I'he K- U-locus in r- K spacc is, of coursc, f'(K) - r~- ó, and is
clownward-sloping. Figurc 5 illustrates how the intcrsection of these twu luci
givcs the equilibrium Ievels of the interest rate and the capital stock, say, r''
and K''. The presence of social custs arising from a tlow of pollutants mrans
that the steady-state capital stuck is below and the stcady-state real intcrctit
I'ullurinn Conrro! and rhe Rn~nsry Prohlem
225

A -U

Fig. 4. Flow externalities and the Ramsey problem.

Fig.S. Pullution anJ thc mrxlified golden rule.

22Ó F. wut drr Ploeg rurd C~. N'ithagerr

rate is above the modified goldcn rule, givcn by puint E. This gives rise to the
"Folluted Golden Age", E'. The strict uparation between tastcs determining
the real interest rate and technology then determining the cxpital stock and
the level of consumption disappears, because technology and pollution
externalities now interact to drive up the real interest rate.
An increase in the emission-output ratio, a, steepcns the C~(1-locus in
r- K space and increases the steady-state real interest rate and reduces thc
socially optimal steady-state capital stock (move from E' to E"). Becausc
less capital is being used for environmental reasons, Icss is produced and
thus less ís consumed. Figure 4 also shows that, even though the steady-state
level of consumption must fall, on impact cunsumption jumps up (from l~' to
A) before it declines (move along S'S" from A to E'). This misadjustmcnt
of consumption in response to an increase in pollution is the only way in
which consumption can be cut in the lung run. Similarly, whcn une managcs
to cut the emission-output ratio, consumption in the socially optimal uut-
come must first fall before it can increase in the lung run (path E"A'E').
This reminds one of the French proverb: "recul~r pour micux sautcr".
The comparative statics with respect to the depreciation, b, and the pw-r
rate of time preference, B, can be performed in a similar fashiun. An incrcasc
in either of these two parameters shifts the C~(l-lucus in r- K spacc up
and consequently the eyuilibrium real rate of interest increases whilst thc
equilibrium capital stock falls. Hence, the levels of pruductiun an~ cunsuntp-
tiun fall.
The easiest way to sustain the socially optimal uutcome in a decentralisril
market economy is to levy a Pigouvian tax on pollution af(ti ), at a ratc
equal to Dt(af(K')) and to redistribute thc revenucs in a lump-sum fashiun
to firms.

6. Stuck Extcrnulitics and thc Ramscy Prublcm

If pollution is dctrimental to the welfarc of socicty as a stock, thc wcial
planner maximises

Iv ~~ exp~-er l 1~3(~~(!)) -[~,(,~~(!))I d, (~,. I)

~~
suhjcct to ( -1.2) ancl (-1.3). Tltc dcprcrialiun ralc of lhc stuck uf pullulants i,
atisumcd to be cunstant, a(A) - a, ,u lor thc timc brinb thcrc arr nu
resuurccs u~cd to clcan up ihc cnvirunmcnt. An intcriur sululiun musl ~alisly
thc mudified Keynes-Ramsey rule

C c t!~(K) ~ I -(czIli'(C'))r~ - fl - J't~((')(' ((r.'1

and the arbitrage rule (cf. (2.8))
T ~ (e f U)~ - o.,(S)- (c~.3)
 I'oNu~iuri Corurol and ~hr Ilrunscy I'rubli~ni 227

Clcarly, the steady-state capital stock is again below the modified golden rule
familiar from Ramsey's problem. For a given emission charge, z, the phase
diabram associated with (4.2) and (6.2) is as was presented in Figure 4. The
C- U-locus is again downward-sloping and intersects the K- U-locus
helow the modified golden rule. An increase in the emission charbe, z, then
shifts down the C- 0-locus and moves the eyuilibrium from E' to E". The
result is luwer Ievels uf steady-state consumption, output and capital.
Similarly, the dynamics of S and z following from ( 4.3) and (6.3) can be
analysed for a given capital stock in the manner discussed in Section 2. The
four-dimensional phase dynamics is difficult to handle analytically. However,
there should be twu eigenvalues with negative real parts associated with the
predetermined variables, K and S, and two eigenvalucs with positive real
part, associated with the non-predetermined variables, C und z, in order for
lhc system tu ,atitify the saddlepoint property. This will be the case as long as
thc rate of timc prcfcrcnce, d, is not wo high (see Appendix).
If one assumes that thc S- z dynamics adjust much more quickly than
thc C- K dynamics, which is the case when ( a~a) is extremely large, one
can solvc under thc assumption i: U and substitute the optimal ( steady-
statc) cmission charbc
z - D.,(uJ~(K)Iu)~(~ -~- a) (6.4)
dircctly into the mudified Keynes-Ramsey rule:

C z ~j'(K) I1 -(a~l3'(~7) (U:~(aI(ti )~a)~(91- a)) -

B - a y ~~(C)c (~~.s)
l~he yualitativc f~atur~s of Figur~ -1 apply, because (6.~) and ( 5.1) give rise to
yualitativcly similar C - U-loci.
Sincc attcntion is restricted to the case where a(A) ~ a, a constant,
standard methods yicl~ the followinó comparative statics results for the full
luur-~limrn,iunal systcm ( ,ee Appenelix). A hibh~r emission-output ratio (a)
t;ivcs again lowcr stcady-state Ievcls fur the stock of capital, production, and
consumptiun. Thc cl(rcts of an increase in the abatement coefficient a are
uppusilc tu thc cllrrts uf a hi~hcr a, so it is optimal from socícly's
prrsprctívc tu havc an inrrcatie in capital, production and consumption.
I'~rfurming thc ccimparative statics around the steady state with respect to
B .~ncl a yields
U,` u ,(~., ), l
(ur -!3')f' f ~- r(H - r)B" r dK
u(l) t u) J

~-
IS'(2U f u- r)
d-F u
d 0- L zJ.' f
r ~ aff [)~
a(a -r- 0)
11

1 J da. (6.6)

l~ltc tcrm assuciatcd willt dK is positive. It follows th .~t (aKiaa) ~ U as lunb

 228 I: rwn dcr I'lucl; rurd C. Wrrhuben

as a is high enough. Hence, as long as the environment's rate of bre~iking

down the stock of pollutants is high enough, an increase in the emission-
output ratio depresses the optimal stock of capital and thus the rate of
production. If B or a is sufficiently large, as seems extremely reasonable to
assume, a higher rate of time preference induces a lower stock of capital and
hence lower rates of consumption and pollution.

7. Abatement Activities and the Ramsey Problcm

Consider the problem of Section 6 but now also take into account the
optimal use of resources to clean up the environment, A. If an interior
solution for C and A is assumed, one must have as necessary conditions
equations (4.2) and (4.3) and equations

B~(C)' Z (7.1)
ro'(A)S - .~ (7.2)
~ - (ar-~)f'(K)f (e f ó)~ (~.3)
and

i - (9 -~ a(A))t - Ds(S). (7.4)

Here r is again the optimal emission charge and ~l is the shadow price of the
stock of capital. Due to the concavity-convexity assumptions there exists a
unique steady state, characterised by K-~ - 0 and hence ~-.4 ~~1 ~
i- 0. Furthermore, if 6 is small enough, the steady state is locally asymp-
totically stable. This is not straightforward but it follows from the fact that
the Jacobian matrix of the linearized system can be written as

~ H, ,-F- 91 H, 2
-
H,, H,2

where all submatrices are 2 x 2, H„ --H;,, H,, - H;,, N,, - Il~,. Thcn
it follows that if w is a characteristic root of J, -w f,i is a characteri`tic
root as well (see Appendix). So, for B small enougli, thcre are two cigen-
valucs with negative real parts and there exists a stable manifold containing
the steady state. It can be shown that this manifold is non-degcnerate.
It makes therefore sense to study the steady statc in somc detail. First note
that the steady-state stock of capital is again smallcr than thc modified
golden rule stock of capital. This follows immediately from ~- 0 and ar ~
0 in eyuation (7.3).
Comparative statics calculations are rather tedious and do not Icad to
unambiguous outcomes (see Appendix). This is in line with e~trlicr findings
by Bccker and Musu. As an example consider the effect of increasing the rate
of time preference B. In the Ramsey model one has j'(K) a 9 f- b so that
 !'ulhr~iun C~urruul und dtr Krunsey Pruhlrnr 229

grcater impatience leads to a smaller stock of capital. This effect is present in

the extended model as well: the economic subjects want to consume as early
as possible and therefore accumulate less capital. On the other hand, if it is
not very costly to abate pollution, in other words, if the abatement tech-
nology displays a high degree of efficiency (a' is "large"), a low stock of
capital leaves less room for cleaning activities because net output is smalt,
whereas such activities may contribute considerably to welfare through the
reduction of pollution. It is not clear a priori which effect dominates, so that
a higher rate of time preference may lead to more capital accumulation.
I3ecker (1982, p. 183) also finds that greater impatience may increase the
stcady state stock of capital but this only occurs in an unstable steady state
and if the marginal productivity of capital is increasing in the generation of
waste products. This phenomenon also occurred in the present model
without abatement activities (see Section 6). In the Musu paper a higher
stock of capital may be caused by the increase in the value of the marginal
productivity.

8. Investment in Cleun Technology `

It has been assumed in the previous sections that environmental investment is
clirected only to activities to clean up the environment. Here the possibility of
invcsting in clean tcchnology is studied. It is assumed that the emission-
output ratio can bc reduced by investment in clean technology, l, that is a-
u(I), a' ~(1. There are diminishin~ returns to such investment, so a' 3 0.
The social planner maximises the social welfare function

ll' ~ Iw cxp(-fIl)~lt(Y-!)-Dt(a(1)Y)-D,(S')~dt (tS.l)

JJJ~

tiuhjcct tci

.S - a(I)Y-aS (8.2)

)' S Y„~,,. (8.3)

As.uming an intcrior solution for Y, I and C, the necessary conditions are

1~'(Y-1)- ~(l~~l~f(a(1)Y)f T~ (H..~)

li'( Y-1) --a'(1) YI DÉ(a(1) Y) -F- r~ (8.S)
T - ((J
J f O)7 - U~(.S) (H.i))

S` a a(I)Y-a.S. (8.7)
It fullows from ecluations (8.4) and (8.5) that the Icvel of production and
thc Irvcl ol invcstmcnt in clean technology are directly correlated, Y~
230 l.: rurr drr I'lur~ und C'. t4'~dml;en

-a(I)Ia'(I) á Y(1). If a(1) has a constant elasticity, say r~, then }'(I) -
l~r~ and Y and 1 go up and down together. The locus for which i~ U is
given by z s D:,.I(9 f a) and is upward-sloping in z- S space.Thelucus for
which S - 0 is I;iven by S --a'Iaa' - a(I)l~oq - S'(!), whcrc .S' is
ncgative ( positive) when q is less than (exceeds) utility. The levcl of invest-
ment in clean technology, l, as a functiun of z I'ollows Irom (ti.4):

B'1 a(~))-1)
r~ ,
- Df(-a-(1)~a~(1))
a(1) - z(I). (8.8)

Together with S a S(1), equation ( 8.H) gives thc S- U-lucus in z- S spacc.

The slope of the S a 0-locus in r- S space is amhiguuus. Its sign eyuals the
sign of
B" - a'-DÉ - B'(a')'I(-2a(a')z f a'a').
Since a' ~ 0 the third term need not be negative. It is likcly, however, that
the entire expression is negative. Then there exists a steady statc which is
stable and comparative statics is warranted. A higher rate of time preference
6 causes a lower position of the i- U curve and does nut affect the S a(1
locus. As a consequence the steady state level of pollution increases and its
shadow price decreases, as would be expcctcd. An intcresting yuestion is
whether investments ! increase as a conseyuence of a higher stock of
pollutants or not. In the steady state a(I)Y a aS. So a highcr S calls for
higher Y andlor lower L But Y and 1 are related by -a'(I)Y m a(I), saying
that along an optimum the increase in pollution due to a marginal incrcase in
produc[ion should be compensated by allocating additiunal resourccs to
investment. In the steady state then investment in clean technology, l,
increases as the stock of pollutants increases if and only if -3(a')' f aa"
1 U. So, for example, if the investments in clcan technology have lincar
returns (a" - 0) thc S- 0 locus slopes unamhiguously downwards and a
higher rate of time preference will decrease the willingness to invest in clcan
technology. However, suppose that a(I) - 1-'r(r~ ~ U). Then a(!)Y -
1'-~~i~ and in the steady state investment in clean technoloby increascs with
the concentration level of pollutants if and only if r~ ~ I. Hence, if there are
large returns to investment in clcan technology an increasc in impaticnce can
increase the willingness to invest in clean technology.
There arc many possible ways of extending thc abovc modcls to allow for
pollution and investment in clean technology. An uhvious extcnsiun is to
embed the analysis of this section in thc Ramsey modcl. This would alluw for
investment in productive capacity, for production to depend un thc capital
stock, and for investment in a stock of clcan tcchnulol;y, 7; say a('l~). Thc
resource constraint for thc cconumy would thcn hc f;ivcn by

K- f(K )- C' - T- b(K f T). (t{.9)

Pullnriun ['unnul und rlu~ (lurnx~~' I'rublrm 231

This is left tor further research.

9. Renewable and Exhuustible Environmrntul Resuurces

The modcls prescnted su far call for numerous extensions and grneralisa-
tiuns. It is not the objcctive of the present pap~r to give an exhaustive
account of all possible directions that future research can take. It seems,
huwever, important to stress the interrelationship between the environment
and renewable andlor exhaustible resources. This section provides an
illustrative example of how this can be done. The stock of environmental
resources, E, is depleted, because it is used up us a factor of production, R,
(e.g., trees in thc production of paper or other flora, fauna, coal, gas, etc.).
This is detrimental to social welfare, both directly (Icss woods to enjoy) and
indircctly as there are only limited resources, so eventually thc current level
of prucluctiun anci cunsumption may no longcr br sustainablc. Thc sucial
planner maximises [he soci;il welfarc function

lt' -
J cxr(-(1! ) ~B(C') - D, (af(K)) - 1)ti(.S') f U(l.~)~ cll (t~. l)

~ubjcct t~i

ti ~ J~(K, K)- C'-bK, (y.')

.1' ~ uJ(K.Il)-aS' (~J.3)

anil
È - !l(L. S')- 1z. (t).~)

whcre U(1: ), U' ~ l), U" C U ~1enc~tcs thc clirect utility suci~ty tlerives frum
thc stuck of cnvirunmcntal rrsourc~s. Th~rc are thrcc dyn;unic eyuations:
unc fur thc physical cahital stock, onc for the stock of Ixillutants antl onc
ncw ~mc litr the stock uf environmental resourccs. ~'he case of cxhaustiblc
resuurc~s curresponels to If(1:, J') - l). The gcncral case of renewahle
rrsiiurccs allows lur saltu-atiun in ~rowth, H~ ~ ll for L: C L~, !!r C U, for
E~ L-' and Hrr C U, and ;illuws pollution to havc an awcrs~ clfect on the
natw~al rrplcnishmcnt rate, H, C ll. Thc propertics of thc special case of tltis
Itruhlcm which i~,nures the dircct cffccts of thc stock of t'nvirunmcntal
rc~uurcc~ em social wclfare is hrietly discussctl in Tahvuncn and Kuuluvaincn
( I ~1~)t)).
As a lir~t shc~t, it sccros sc:n~iblc tu focus on thc environmental exter-
nalitics unly, so it is assumctJ that ll(F, S) ~ H(1:) and U~ 3 U, ~ l). The
m~~tiific~l Kcyncs-R:unsry rule bccomcs
C~ - U,,(K, K) - 0- á~~~(C)C' (9.S)
 F. wui drr 1'lut'g ur~~l ( '. lVidia~rn

whilst the social value of the environment to society, say ~, must satisfy
i;-~e- H"(E)le-u'(~)
and the use of the environmental factor of production follows from

Q~(C)ÍK(K, R) ~ e. (9.7)
Equation ( 9.5) is familiar. Equation (9.6) says that the value of the stock of
environmental resources to society is eyual to the discounted value of future
marginal utilities, where the social rate of discount is eyual to the purc
rate of time preference minus the natural replenishment rate of the stock of
environmental resources. Equation (9.7) says that the marginal bencfits of
environmental resources in productíon should equal the marginal value of
these resources to society.
lf the production function displays constant returns to scale in capital and
resources, the marginal products of the intensive-form production function
are homogeneous of degree Zero. Upon solution of equation (9.7) for R and
substitution of the result into equations (9.2), (9.4) and (cL5), one obtains:

K i KI~(t~~(E. C))-C-óK (~l.?')

É- H(F)- K~(e, C), ~,. G ll. ~c G 0 (9.3")

C' ~W(e. C')- e- ó~rl(C )C. Vi~. C(1, W, C(l. (c1.4')

The comparative statics of this model are left for further reuarch.

10 Cuncluding Remarks
This paper addressed the problcm of simultaneously dctermining the socially
optimat stock of physical capital and environmental yuality and examined
how Pigouvian taxes can be used to cnforce thesc in a decentralised
economy. Both ilow and stock externalities in the control uf pollution wcre
considered. These externalities arise, because pollution is a by-product of
production and is mostly gradually dissolved in the environmenl. Optimal
investment in clean technology and optimal abatcment activitics were also
cunsidered. When matters are Icft to the market, cleaning up of thc environ-
ment does not take place and the levels of production and consumption will
be too high from society's point of vicw. Thc governmcnt should step in and
levy emission charbcs, clcan up the environmcnt and pruvidc incentivcs tc~
invest in clean technology. When one allows for pollution of the environmcnt
in the classical Ramsey problem, the capital stock is gencrally less than under
the modified golden rule (which prevails undcr thc market outcume) and a
fortiori less than under the golden rule. As a conscyucnce, the ratc of
consumption is also less. The problem the policy makcrs arc facing is thus to
reduce consumption and to direct investments to clcan tcchnology and ah.ne-
ment activities. This can be achieved by appropriatc (dynamic) Pigouvian
taxation. Of coursc, it is Icss appropriatc in this long-run scttinb to rcly on
Pulhuia~ Cuntrulutl4 the Knnuey ProGlam 233

the Coase Thcorem, as intergenerational bargaining opportunities are hard to

establish.
For the models that have been used, it has been shown that there exists a
steady state which is locally asymptotically stable and whose comparative
statics properties have been analysed. The paper also reviewed and, when-
ever possible, provided a synthesis of environmental problems in the
extended neoclassical Ramsey framework of optimal capital accumulation
and economic growth. There remain many open questions. For example, the
relationship between the models studied here and those models concerned
with renewable and exhaustible resources deserves more attention. Future
research should tackle the difficult problems involved in analysing such
integrated models.

Acknowledgements
An earlier version of this paper was presented at the EAERE conference
"Environmental Cooperation and Policy in the Single European Market",
Venice, Italy, 17-20 April, 1990. The authors are grateful to three anony-
mous referees for their helpful comments on an earlier version of the paper.

Appendix
(a) Local stability analysis for Sections 6 and 7.
Del'ine ~:- -r. ~ is the (negative) shadow price of the stock of ~pollutants.
Consider the system of equations (4.2), (4.3), (7.1)-(7.4). C can be solved
from 13'(C) a ,~, to yield
~À - I~i3', ~N ~ U. C` ~ (].

Thcn A is sulved from -~a'(A)S ~.~, giving

A,; s a'.l.a", At, - a'a'S~.~Q', As : a'a'~~.l,a'.
Nrxt (-l?), (-l.3), (7.3) and (7.4) are linearized in the steady stale. Straight-
lurwar~i calcul.uiuns givc the following Jacobian matrix.

-1' t u t~f -~rl' -t.i t aN)I' u

'~u'u~, nu' ( u t tr.)a'u'u'~.tu") t B 0 ttrtra'do'~.io-) } I1-
J -
-I (t" - u'iÀu" -.Su'u'~,iu' J' - d -po'u'~Ào"
-.1du~~ÀU" -SSo'du'l,iu' a~' -u-NJu'u'u'~.iu'

nr :Illl'rnilllYl'ly

f(i~fl)l Hi,)
l-l
`Il,~ H..

whcrc for all i and j f!„ are 2 x 2 and H„ z-H;,, H,, ~ H;,, H,, a H~,.
234 F. tY~n drr !'locg uild C. Wilhugril

Define

Q-

Then it is easily verified that QJQ-' a-J~ f ~I. Let yi be an eigenvalue of

J and let x be the corresponding eigenvector. Then
QJx - QV~x ~ ~VQx i-JT ~x f 6IQz.
So -yi f 9 is an eigenvalue as well.

(b) Comparative statics analysis for Section 7(a' ~ 0).

Upon substitution of .~ and s from (7.1) and (7.2) into (7.3) and (7.4) the
following system results for the steady state.

((a~a'.S)- 1)f'f(9-f-á)~0
((~ -~ a)B'~a'S) - D,~ - 0
af-aS-O
j-bK-C'-A-O
where the arguments of the functions involved have been omitted. Straight-
forward but tedious calculations lead to the following system

aa'f' } aa"f'Sa j
1)
~ 1 a.s
a- r- a'a.Sf
(a.s)'f Jr dK f{-
l(a.s)' dS
(a,s)' J

}da~-d6fdá-0 (A.I)
}{- (a,S~ } áS

J(9 f a)B'B }( a'!3' } B } a -!3 a"S ) a!

~ dK
l a'S ` a'S ( ) (a'S')' a'S

} ~ - (B -~ a)l3'a' - D" .}. (B -F a)D' a }

(a'S)' ~ a'S a'S

} I a 13 -B'a"S )-a 1
f B f a dS'
l a'S ( ) (a'S)' a'S J

} (9-~a)B"f } af3 } - [3' a".S

6fa
- (a'S)- f a'S ( ) ( a".5' )'
-(9 f a)B"K
dá f B dB a 0. (A.2)
a'S a'S
 Polluriort Connul ond rlre Humsry Prublrrn 235

Since f C U, a~dS - 1 C U, á~ 0, D" 1 0 and B" C U it is easily seen

that all coefficients are positive except for the coefficients of dS, which are
negative, and the one corresponding with dK in (A.2) of which the sign is
not uniquely determined. Therefore not much can be said about the com-
parative statics in the general case.

(c) Comparative statics analysis for Section 6(a' - 0).

For a' - 0 ttte following system is obtained

(as - 13')f" 0 af' -!3'f' t(B f ó)L3' dK

U -D; B-~ a 0 dS
('-b 0 0 -1 di
af' -a 0 0 dC

if' B' l3' 0 da

U i U i d9
U 0 -K 0 dó ~
f U U -S da

The results given in the text originate from Ihis system, where it should be
realized that D" 1 U, R" L 0, f" C U, f 1 ó-F- B, as -!3' C 0.

Notcs
~ Huwrvrr, il thr wcial Jamagr function brcumrs, Jur tu thresholJ rffrcts, concavr bryunJ a
crrtain Irvrl u( thc aork uf Ixtllutanl~, two cyuilihria may cxiu, for rxample F anJ P.
Huwrver, L iti saJJlrpuint slahk whilsl I' i~ glubally untitable.
- In a utilitari:~n (ramrwork ~rith pupul~liun growlh B- p - n, whcre p i~ thr rate ul purr
timr prclerrncr anJ !1 b thr rJlr UI pUpulanUn ~,rOWtl1.
' I'rrv)uus wurk employrJ muJrls with twu-srcwrs, one pruductiun srrwr anJ unr ahatr-
ntrnt ~rclur (Sirbrrl, I `IE37; Musu. I')KN).

Rcfercrtccs

li~ckrr. K~)h~rt A. (19K3), 'Intrrgrncratiunal l.yuity: l~hr Capital-Fnvirunmrnt Tr;tdr-OII'.

Juunrrrlu~ l:rnirunutrruu! E:runuarlc.~ und Afu~mgeinrnr 9, IGS-IHí.
131ancharJ. Olivirr J. anJ Stanlry Fi,chrr (IyM9). Lernrres on Alurrueconumi(.,, MI-( Prr~s,
CamhriJHr.
13rurk. N'illiant A. ( 1~)77), 'A 1'ollutrJ GalJrn Agr~, in V. Smith (rJ.), Eruaunurs uJ n„n,rr,!
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Reprint Saríea, CentEA, Tilburg Univeraity, The Netherlanda:

No. 1 0. Maríní and F. van der Ploeg, Monetary end fiscal policy in an
optimising model with capital accwulation and fíníte lives,
The Economic Journal, Vol. 98, No. 392. 1988, pp. 772 - 786.

No. 2 F. ven der Plceg, International policy coordination in interdependent

monetary economíes, Journal of Internationel Economics, Vol 25, 1988,
PP. 1 - 23.

No. 3 A.P. Barten, The history of Dutch ~acroeconomic modelling

(1936-1986), in W. Driehuis, M.M.O. Fase and H. den Hartog ( eds.),
Challenges for Mecroeconomic ModellinR, Contributiona to Economic
Malysia 178, Amaterdam: North-Nolland, 1988. PP. 39 - 88.

No. 4 F. van der Plceg, Diaposable i ncome, unemployment, infletíon and

atate spending in e dyneoíc polltical-econo~ic model, Public Choice,
vol. 60, 1989, pP. 211 - 239.

No. 5 Th. ten Rea and F. van der Plceg, A statistical epproach to the
problem of negatíves in input-output enalysis, Economic ModellinR,
vol. 6, No. 1, 1989. PP. 2- 19.

No. 6 E. van Demme, Renegotíetion-proof equilíbria in repeeted prísoners'

dilemma, Journal of Economic Theory, Vol. 47, No. 1, 1989.
pp. 206 - 217.

No. 7 C. Mulder and F. van der Ploeg, Trade unions, investment end
employment ín a small open economy: a Dutch perapective, in J.
Muysken and C. de Neubourg ( eds.), Unemployment in Europe, London:
The MacMillan Presa Ltd, 1989. pp. 200 - 229.

No. 8 Th. ven de Klundert and F. ven der Plceg, Wage rigidity and capital
mobility in an optimizing model of e amall open economy, De Economist
137. nr. 1, 1989. pP. 47 - 75.

No. 9 G. Dhaene and A.P. 8arten, When it ell begen: the 1936 Tinbergen
model revisited, Economic ModellinR, Vol. 6, No. 2, 1989.
PP. 203 - 219.
No. 10 F. van der Ploeg and A.J. de Zeeuw, Conflíct over arms accumulation
in ~arket and command economies, in F. ven der Ploeg and A.J. de
Zeeuw (eds.), Dynemic Polícy Cames in Economics, Contributions to
Economic Analysís 181, Amsterdem: Elsevier Science Publishers B.V.
(North-Hollend), 1989, pp. 91 - 119.

No. 11 J. Driffill, Maccoeconomic pollcy gemes with incomplete ínforma[ion:

some eztensions, in F. van der Plceg and A.J. de Zeeuw ( eds.),
Dynamic Policy Games in Economics, Contributions to Economic Malysis
181, Amstec~dam: Elsevier Science Publishers B.V. (North-Holland),
1989. PP. 289 - 322.

No. 12 F. van der Ploeg, Towards mone[ary integration in Europe, in P.

De Grauwe e.a., De Europese Monetaire Integratie: vier visies,
Wetenscheppelijke Read voor het Regeringsbeleid V 66, 's-Gravenhage:
SDU uítgeverij, 1989. PP. 81 - 106.
No. 13 R.J.M. Alessie and A. Kapteyn, Conawption, savings and demography,
in A. Wenig, K.F. Zimoermann ( eda.), Demographic ChanRe and Economic
Development, Berlin~Heidelberg: Springer-Verlag, 1989. pP. 272 - 305.

No. 14 A. Hoque, J.R. Magnus and B. Pesaran, The exact multi-period mean-
square forecast error for the firat-order autoregreasive model,
Journal of Econometrics, Vol. 39. No. 3, 1988, pp. 327 - 346.

No. 15 R. Alessie, A. Kapteyn and B. Melenberg, The effects of liquidity

constraints on consumption: estimation from household panel deta,
European Economic Review 33. No. 2~3. 1989. pp. 547 - 555-

No. 16 A. Holly and J.R. Magnus, A note on instrumentel variables end

maximum likelíhood estimation procedurea, Annales d'Économie et de
Statistigue, No. 10, April-June, 1988, pp. 121 - 138.

No. 17 P. ten Nacken, A. Kapteyn end I. Woittiez, Unemployment benefits end

the labor market, a micro~macro approach, in B.A. Gustefsson and N.
Mders Klewerken (eds.), The Politicel Economy of Sociel Security,
Contributions to Economic Analysis 179, Amsterdam: Elsevier Science
Publishers B.V. (North-Holland), 1989, pp. 143 - 164.

No. 18 T. Wanebeek and A. Kapteyn, Estimation of the error-components model

with incomplete penels, Journal of Econometrics. Vol. 41, No. 3,
1989. pv. 341 - 361.

No. 19 A. Kapteyn, P. Kooreman and R. Willemse, Some methodological issues

in the implementation of subjective poverty definitions, The Journel
ot Humen Resources, Vol. 23. No. 2, 1988. vP. 222 - 242.

No. 20 Th. ven de Klundert and F. van der Plceg, Fiscal policy and finíte
lives in interdependent economies with real and nominal wage
rigidity, Oxford Economic Pepers, Vol. 41, No. 3, 1989, pp. 459 -
489.

No. 21 J.R. Magnus and 8. Pesaran, The exact multi-period mean-square

forecast error for the first-order eutoregressive model with en
intercept, Journal of Econometrics, Vol. 42, No. 2, 1989.
pp. 157 - 179.

No. 22 F. van der Plceg, Two essays on political economy: (i) The political
economy of overveluation, The Economíc Journal, Vol. 99, No. 397.
1989. pP. 850 - 855; (11) Election outcomes and the stockmerket,
Eurocean Journal of Political Economy, Vol. 5, No. 1, 1989, pp. 21 -
30.

No. 23 J.R. Magnus end A.D. Woodlend, On the meximum likelihood estimation
of multivariate regreasion models containing serially correlated
error components, International Economic Review, Vol. 29, No. 4,
1988. DP. 70T - 725.

No. 24 A.J.J. Talmen and Y. Yamamoto, A símpliciel elgorithm for stationery

point problems on polytopes, Mathematics of Operations Research, Vol.
14, No. 3. 1989. pp. 383 - 399-
No. 25 E. van Damme, Stable equilibria and forward induction, Journal of
Economic Theory, Vol. 48, No. 2, 1989, pp. 476 - 496.

No. 26 A.P. Berten and L.J. Bettendorf, Price formation of fish: An

application of an i nverse demand system, European Economic Review,
vol. 33. No. 8, 1989. PP. 1509 - 1525.

No. 27 G. Noldeke and E. ven Damme, Signalling i n a dynamic lebour market,

Review of Economic Studiea, Vol. 57 (1), no. 189, 1990, pp. 1- 23

No. 28 P. Kop Jansen and Th. ten Rea, The choice of model ín the
construction of input-output coeffícíente metrices, Internetíonal
Economic Review, vol. 31, no. 1, 1990, pp. 213 - 227.

No. 29 F. van der Plceg and A.J. de Zeeuw, Perfect equílibrium in a model of
competitive arma accumulation, International Economic Review, vol.
31, no. 1, 1990. PP. 131 - 146.

No. 30 J.R. Megnus and A.D. Woodland, Separability and Aggregation,

Economíce, vol. 57, no. 226, 1990, pp. 239 - 247-

No. 31 F. ven der Plceg, International interdependence and policy

coordination in economies with real end nominel wage rigidity, Greek
Economic Review, vol. 10, no. l, June 1988, pp. 1- 48.

No. 32 E. van Damme, Signaling and forward ínductlon in a market entry

context, 0 eretions Research Proceedin a 1 8, Berlin-Heidelberg:
Sprínger-Verlag, 1990, PP. 5- 59.

No. 33 A.P. Barten, Toward e levela versíon of tha Rotterdam and releted
demend systems, Contributions to 0 rationa Research and Economics,
Cambridge: MIT Press, 1989. PP. 1- 5.

No. 34 F. van der Plceg, Internetional coordinetion of monetary policies

under alternative exchange-rete regimem, Advanced Lectures in
Quantitative Economics, London-Orlando: Academic Press Ltd., 1990,
PP. 91 - 121.

No. 35 Th. van de Klundert, On socioeconomic causes of 'waít unemployment',

European Economic Review, vol. 34, no. 5, 1990, pp. 1011 - 1022.

No. 36 R.J.M. Alessie, A. Kapteyn, J.B. van Lochem and T.J. Wansbeek,
Indívidual effects in utility conaiatent models of demand, in J.
Hertog, G. Ridder and J. Theeuwea ( eda.), Panel Date and Lebor
Market Studies, Amsterdam: Elsevier Science Publishers R.V. (North-
Holland), 1990, pp. 253 - 278.

No. 37 F. ven der Ploeg, Capital accumulation, infletion and long-run

conflict in international objectives, Oxford Economic Papers, vol.
42, no. 3. 1990. pp. 501 - 525.

No. 38 Th. Nijmari and F. Palm, Parameter identification in AItMA Processes in

the presence of regular but incomplete sampling, Journal of Time
Series Analysis, vol. 11, no. 3. 1990, pp. 239 - 248.
No. 39 Th. van de Klundert, Wage differentials end employment in e two-
sector model vith n dusl labour market, Metroeconomica, vol. 40, no.
3. 1989. PP. 235 - 256.

No. 40 Th. Nijman and M.F.J. Steel, Exclusíon restrictions in instrumental

variables equations, Econometric Reviews, vol. 9, no. 1, 1990. PP. 37
- 55.

No. 41 A. van Scest, I. Woittiez and A. Kapteyn, Labor supply, income taxes,
and houra restrictíons i n the Netherlands, Journal of Human
Resourcea, vol. 25, no. 3. 1990. PP. 517 - 558.

No. 42 Th.C.M.J. ven de Klundert end A.B.T.M. ven Schaik, Unemployment

peraistence and loss of productive capecity: a Keynesian approach,
Journal of Mecrceconomica, vol. 12, no. 3, 1990, pp. 363 - 380.

No. 43 Th. Nijmen and M. Verbeek, Estimetion of time-dependent parameters in

linear models using crosa-sections, panels, or both, Journal of
Econometrics, vol. 46, no. 3. 199~1. PP. 333 - 346.

No. 44 E. van Damme, R. Selten end E. Winter, Alternating bid bergaining

with s amallest money unit, Games and Econosic Behevior, vol. 2,
no. 2, 1990. PD. 188 - 201.

No. 45 C. Dang, The D-trianguletion of Rn for simpliciel algorithma for

computing solu~iona of nonlinear equations, Mathematica of Operations
Research, vol. 16, no. 1, 1991, pp. 148 - 161.

No. 46 Th. Ni~man and F. Palm, Predictive accuracy gain from disaggcegate
sampling in ARIMA modela, Journal of Business d, Economic Statistics,
vol. 8, no. 4, 1990, pp. 405 - 15.

No. 47 J.R. Megnus, On certain momenta relating to ratios of quadretíc forms

in normal variables: further results, Sankhya: The Indien Journal of
Statiatics, vol. 52, aeriea B, part. 1, 1990, pp. 1- 13.

No. 48 M.F.J. Steel, A Bayesien analyais of simultaneous equation models by

combining recursive annlytical and numerical approachea, Journel of
Econooetrics, vol. 48, no. 1~2, 1991, pp. 83 - 117.

No. 49 F. van der Plceg and C. Withagen, Pollutlon control and the ramsey
problem, Environmentel end Resource Economícs, vol. 1, no. 2, 1991,
pp. z15 - 236.
p(~ r~nY an~~~ ~nnn i~ T ii Rl IR(` TuC n~~TU~oi.ANDS
Bibliotheek K. U. Brabant

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