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Economics Research Institute Study Paper




Utah State University Department of Economics

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In this paper, we present a nonrenewable resource model including environmental pollution as a state variable. The model is analyzed to identify some of the characteristics of the optimal paths. In addition, we present a numerical example on the basis of the algebraic solutions of our qualitative model, and identify some of the characteristics of the optimal time paths for two sets of social costs of the pollutant. These results are consistent with the proposition of the previous literature that levying the shadow cost of the pollution stock reduces the consumption of resource; hence, it slows the accumulation of the pollutants in the atmosphere. One quirk in the results, however, is that extractions will persist longer in the higher pollution cost scenario. The costate variable for the resource stock is decomposed into a scarcity effect and a cost effect and the costate variable for the pollution stock is decomposed into an undesirable abundance effect and a cost effect. Both of these, however, are cost effects.