Control of accumulating stock pollution by heterogeneous producers

This paper presents a framework to determine optimal resource allocation over time for the production of a good by heterogeneous producers who generate a stock externality. We analyze the optimal intertemporal and quality-specific combination of abatement strategies at the source (source abatement) given by a change in the intensity (intensive margin) of production and in the chosen technology (extensive margin), and/or removal of existing pollution stock (stock abatement). The results show how the specifications of the production and the emission functions affect technology adoption and the design of the optimal intertemporal combination of source and stock abatement strategies. Moreover, the paper shows that regulation at the intensive margin cannot be considered as a substitute for a regulation at the extensive margin. The paper employs the so-called two-stage solution approach for solving the resulting quality distributed-intertemporal optimal control problem.