(In)Efficient management of interacting environmental bads

Summary

Many environmental problems involve the transformation of multiple harmful substances into one or more damage agents much in the same way as a firm transforms inputs into outputs. Yet environmental management differs from a firm's production in one important respect: while a firm seeks efficient input allocation to maximize profit, an environmental planner allocates abatement efforts to render the production of damage agents as inefficient as possible. We characterize a solution to the hmultiple pollutants problem and show that the optimal policy is often a corner solution, in which abatement is focused on a single pollutant. Corner solutions may arise even in well-behaved problems with concave production functions and convex damage and cost functions. Furthermore, even concentrating on a wrong pollutant may yield greater net benefits than setting uniform abatement targets for a harmful substances. Our general theoretical results on the management of flow and stock pollutants are complemented by two numerical examples illustrating the abatement of eutrophying nutrients and greenhouse gases.