SPACE, UNCERTAINTY AND INTERGENERATIONAL ISSUES: ESSAYS IN ENVIRONMENTAL ECONOMICS

DANILO LIUZZI Abstract, Phd Thesis in Economics This abstract presents the research questions that will be addressed in the four chapters of this thesis. The red line connecting the chapters is the attempt to introduce some aspects of complexity in the traditional literature of environmental and resource economics. A manifesto on the vision of social-ecological systems as complex adaptive systems can be found in Levin et al (2012): nonlinear feedbacks, non convexities, strategic interactions, individual and spatial heterogeneity, varying time scales and stochasticity are key factors that cannot be ignored in the analysis of the complex coupling between the economic and environmental side of our ecosystem. Some of the these key factors will be considered in the models presented in the remainder of this work. The first chapter, , proposes a very simple model of the joint dynamics of capital and pollution, where capital stands for an homogeneous good that can be produced and consumed, while pollution accounts for the environmental degradation. Pollution is a by-product of production and in the meantime negatively affects production via a multiplicative damage function, as in framework of the Integrated Assessment Models proposed by Nordhaus ( 1992) and Nordhaus and Boyer (2000). In these models a functional form for the damage function is assumed and the parameters are estimated ( a literature review about the different functional forms proposed for the damage function is presented in Ortiz and Markandya, 2010). The stronger the effect of damage function, the less satisfactory the outcome of the economic activity. In principle, the damage function can drive the economic outcome to zero only if its denominator assumes an infinite value. This is due to the choice of a Cobb-Douglas production function. In this chapter is shown that assuming an S-shaped function a la' Skiba (1978), multiple equilibria arise and depending on the initial conditions of capital and pollution an economy can be condemned to a poverty trap. The second chapter, Pollution Diffusion and Abatement Activities across Space and over Time, builds on the first , introducing space into the picture. This paper belongs to a relatively young stream of literature that bridges the gap between new economic geography (see, for example, Krugman ) and growth theory ( see Boucekkine et al, 2010). The key assumption is the continuity of space and the possibility of capital and pollution to flow across space thanks to a diffusion-like mechanism. In particular this chapter focuses on the role that capital and pollution diffusion has in shaping the basins of the attraction of the equilibria when a convex-concave production function enters the stage. Diffusion of capital can be either beneficial or detrimental, depending on its intensity and on the initial allocation of capital across space. The results are based on numerical simulation and the complexity of the problem requested an ad hoc numerical algorithm for the solutions to be displayed. The third chapter, Sustainability and Intertemporal equity: a Multicriteria approach, deals with sustainability and intertemporal equity issues through the lenses of a multicriteria approach. In most situations a decision maker have different conflicting criteria to meet: this heterogeneity of the goals is particularly striking when sustainability and long run economic growth have to be taken into account simultaneously. The Discounted Utilitarianism and Green Golden Rule are two social welfare functions, id est two conflicting welfare criteria, that rely on two different normative approaches to the most debated question about what should be considered the appropriate form for a long run social welfare function ( see Heal ). The chapter tries to provide an answer to this question, by evaluating which welfare criteria yields the best outcome: the Chichilnisky criterion ( see Chichilnisky, ) proves to be a valuable unifying framework to interpret the problem. In the fourth and last chapter, Pollution Control under Uncertainty and Sustainability Concern, there is an analysis about the implications of environmental policy on pollution in a stochastic framework with finite horizon and sustainability concern. The idea of minimizing the negative externalities of pollution, taking into account both the damages pollution brings in the short run and the heritage pollution leaves at the end of the time span, echoes the Chichilnisky criterion cited before. The approach has been made more adherent to reality thanks to the stochastic differential equation that describes the evolution of pollution along time.