On the Foundations of Environmental Policy
Chapter 10: Structural Change under Joint Production
∗ with Ralph Winkler 10.1 Introduction The basic idea of the analysis carried out in this chapter is similar to Chapter 9. As in Chapter 9, we will examine the trade-oﬀ between the production of a desired consumption good and an unwanted but jointly emerging environmental pollutant. We will also distinguish between ﬂow pollutants which cause environmental damage solely in the period they occur, and stock pollutants which accumulate in nature and cause environmental degradation in every subsequent period. But in this chapter, we will use a more sophisticated model framework than in Chapter 9 and relax some of the assumptions made in that chapter. First, we formally introduce a time structure for the production process: the production of new capital goods does not occur instantaneously but takes time, and we suppose the existing capital stock to deteriorate at a given rate. Second, the valuation of the trade-oﬀ between consumption and the pollutant is carried out endogenously by assuming a representative consumer with intertemporal preferences. Third, we introduce two diﬀerent methods of production, only one of which jointly produces the unwanted pollutant. This more sophisticated framework allows us to study the dynamics of structural change in the economy. We speak of structural change if the diﬀerent capital stocks within the economy change their relative composition. This takes place if a new production technique is invented, which is the emergence of a new production method, and innovated, that is bringing the new production method into use by investment in the...
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