(c) Assume an infinite horizon, continuous time and certainty. Furthermore, assume an additively separable utility function in consumption C and pollution stock S so that, U(C,S) = u(C) + v(S), where uc > 0; Ucc < 0; vs < 0; vss > 0. Note that the first derivative, and the second subscript denotes the second derivative. The evolution of the pollution stock S over time is a function of consumption, decay rate of the stock of pollution & and abatement through the function, g(S) with gs > 0 and 9ss < 0. Time subscripts are ignored for ease of notation. Show that in the case of a stock pollutant, the marginal utility of consumption should equal the present value of disutility associated with the pollution stock. Interpret the condition.
(c) Assume an infinite horizon, continuous time and certainty. Furthermore, assume an additively separable utility function in consumption C and pollution stock S so that, U(C,S) = u(C) + v(S), where uc > 0; Ucc < 0; vs < 0; vss > 0. Note that the first derivative, and the second subscript denotes the second derivative. The evolution of the pollution stock S over time is a function of consumption, decay rate of the stock of pollution & and abatement through the function, g(S) with gs > 0 and 9ss < 0. Time subscripts are ignored for ease of notation. Show that in the case of a stock pollutant, the marginal utility of consumption should equal the present value of disutility associated with the pollution stock. Interpret the condition.
Chapter7: Uncertainty
Section: Chapter Questions
Problem 7.8P
Question

Transcribed Image Text:(c) Assume an infinite horizon, continuous time and certainty.
Furthermore, assume an additively separable utility function in
consumption C and pollution stock S so that, U(C,S) = u(C) +
v(S), where uc > 0; Ucc < 0; vs < 0; vss > 0. Note that the first
derivative, and the second subscript denotes the second
derivative. The evolution of the pollution stock S over time is a
function of consumption, decay rate of the stock of pollution &
and abatement through the function, g(S) with gs > 0 and 9ss <
0. Time subscripts are ignored for ease of notation.
Show that in the case of a stock pollutant, the marginal utility of
consumption should equal the present value of disutility
associated with the pollution stock. Interpret the condition.
Expert Solution

This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps

Recommended textbooks for you







Managerial Economics: Applications, Strategies an…
Economics
ISBN:
9781305506381
Author:
James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher:
Cengage Learning