Environmental constraints and choice of technology: A dynamic activity analysis

The authors are considering a simple dynamic model of a monopolistic firm with two production techniques using labour and capital as inputs, and yielding marketable goods as well as pollution as two sorts of output. The second activity is more efficient but it causes more pollution per unit of capital. The third one is an abatement activity using labour and capital as inputs. The authors will discuss the successive stages in the evolution of the firm under the environmental constraints. The optimal control problems is solved using Green’s theorem approach in the linear case and phase-plane techniques in the non-linear version. If the initial stock of the equity of the firm is relatively small, then the firm uses the more efficient technology (with higher pollution) first in order to accumulate equity and switches to the ‘cleaner’ technology later.