A model of industrial pollution in a stochastic environment

Abstract

Standard models of pollution abatement assume that pollution accumulation occurs in a deterministic pattern as a by-product of the production process. Governmental intervention often occurs in the form of taxation or mandatory abatement controls to reduce inefficiency caused by incomplete markets. In this paper we assume that the accumulation effect of pollution may be stochastic due, for instance, to the random absorption capacity of the ecosystem. Furthermore, we assume that the level of pollution may vary with input use as well as output level. We proceed to analyze properties of a policy for efficient social management of competitive firms which generate pollution.