Environmental regulation and optimal investment behavior: A micro-economic analysis

This paper develops a simple optimal control model of the firm's investment decisions in the presence of environmental restrictions. The firm is assumed to jointly decide the optimal levels of gross investment, scrappage of capital, and maintenance expenditures. The results of the model indicate that all investment decisions, including both abatement equipment and productive capital, are affected by the manner in which environmental regulations are designed. Moreover, these impacts can be further altered if other unrelated regulations, such as rate base regulation, are concurrently imposed on the firm.