Environmental regulation and economic cycles

Abstract

This paper examines economic cycles that do not depend on exogenous economic actions. More precisely, the paper develops a positive model of government behavior in order to define the intertemporal fiscal policies that are optimal for a country and which, determine both the optimal budget level and the optimal level of environmental quality. For this purpose, we establish an optimal control model involving intertemporal subsidy strategies characteristically used by an authoritarian government similar to those found in central Europe. It will be shown that by applying the Hopf bifurcation theorem,a cyclical strategy – that is, waves of regulation, environmental subsidies alternating with deregulation and cuts in social programs – may represent an optimal policy.In this paper, we propose an extremely simple optimal control model which is applied to budget surpluses and environmental subsidies. We investigate the cyclical environmental policies as applied through the bifurcation theorem. A number of propositions are stated during the solution process. The first proposition sets the rules in the model parameters in order to establish the cyclical policies. A second proposition sets the relationship between the discount rate and the opportunity cost of capital, which is used to determine a taxing strategy which becomes the future optimal subsidy policy.