This chapter describes an incentive-based market that integrates the economic layer and the physical layer to guarantee high-quality physical ancillary services in dynamic power networks. Toward the full liberalization of the electricity markets, it is indispensable to develop a socially optimal regulation market with a high-speed market-clearing mechanism while preventing maliciously strategic biddings of market participants called agents. To realize the markets, the utility functioning as a system operator prepares an appropriate incentive mechanism to elicit the agents’ private information. We refer to this real-time incentive-enabled market as an incentivizing market. After illustrating the issues of the agents’ strategic biddings without incentive mechanisms, we mainly propose incentivizing market mechanisms for moral hazard problems and adverse selection problems in dynamic power networks, respectively. We also discuss features, possibilities, and limitations of our proposed mechanisms through simulations for linear quadratic Gaussian (LQG) power networks.

This paper develops a unified framework in which various types of catastrophic shocks can be simultaneously considered within a standard model of economic growth. We first establish the basic existence and equivalence results. We then apply the framework to an endogenous growth model to consider the influence of disasters on the long-term equilibrium and the transition phase. The result shows that while experiencing disasters may lower the average growth rate of the affected countries, there exist various channels through which the risk of disasters and long-term economic performance are positively correlated. This finding reconciles the apparently contradictory evidence in recent empirical studies.

The Home Appliance Eco-Point System was a subsidy program implemented by the Japanese government from May 2009 to March 2011. The system has two features. First, the subsidy was provided in the form of eco-points that were only exchangeable for environmentally friendly goods. Second, it was a replacement subsidy program for durable goods with uncertain termination dates. We investigate the policy implications of these features. We show that if the eco-points are exchangeable for any goods (i.e., if a simple rebate program rather than an eco-point system is implemented), the same outcome can be achieved at a lower subsidy rate and thus using fewer financial resources. Regarding the eco-point system as a replacement subsidy, we show that the uncertain termination has the same effect as an increase in the subsidy: both accelerate the replacement. Uncertainty is a substitute for a subsidy, thus saving the financial resources of the government. However, there are two welfare concerns: (a) acceleration may not be desirable in terms of the environment, and (b) it costs households their expected utility.

In recent decades, climate change and resource limitations have become serious problems. To overcome these problems, many countries promote the introduction of renewable energy. However, the diffusion of renewable energy requires a novel supply and demand system for electricity. One remarkable method of controlling electricity demand is a demand-side control based on dynamic pricing. This study analyzes electricity consumption behavior using laboratory experiments. In particular, the authors focus on the effect of supply limitations on consumption behavior. The results of the experiment include significant findings that help provide an understanding of electricity consumption behavior. More specifically, the announcement of a supply limitation affects the decision to consume electricity. Results of this study indicate that cooperative people tend to decrease electricity consumption more when they are aware of the possibility of an electrical outage. This finding implies that researchers need a better understanding of the psychological aspects of electricity consumption behavior. (C) 2016 American Society of Civil Engineers.

<p>This paper provides an overview of the standard theory of discounting in cost-benefit analysis. With an application to long-term environmental problems in mind, we begin with the classic issue of discounting and intergenerational equity, which dates back to the seminal work of Frank Ramsey in the 1920s. Then, by reviewing recent developments in the theory of declining discounting rates (DDRs), we show how relatively low and declining discount rates can be justified in the presence of uncertainty. Also, we briefly discuss the practical implications of discounting in the context of climate change.</p>

Economists have argued about various discount rates. Strotz (1955-56) first suggested that there is no reason to consider a time-consistent discount rate such as an exponential function. Over the past five decades, various functional theoretical forms have been proposed, including exponential, hyperbolic, and quasi-hyperbolic. Simultaneously, empirical studies have found there is a possibility that observed discount rates are not constant over time. The data tend to not fit exponential functional forms but rather hyperbolic ones; this implies declining discount rates. Furthermore, empirical studies have found that discount rates vary across objects. Fredrick et al. (2002) summarized the annual discount rates found in previous empirical studies. Table 23.1 summarizes annual discount rates estimated in previous literature. The literature suggests various annual discount rates, and the results depend on the type of goods, the time range, and/or the estimation methods. In this chapter, we consider the discount rates on environmental values, and especially on long-term problems, as these are not empirically addressed in previous literature.

We show that in poor resource-based communities, the socio-psychological preference for employment, which arises from a strong desire to follow the communal norm of sharing in harvesting efforts, can lead to the optimality of full-employment harvesting until resource extinction. We show that such communities may be able to sustain both their natural resources and full employment by using outside-the-community employment opportunities or by economic diversification. However, to be effective, such policies must ensure that the outside wage rate and the initial capital stock are above certain minimum levels which depend on the existing size of the resource stock, the characteristics of the community’s harvesting technology, and the biological growth characteristics of the resource in question, and which will be higher the longer the remedial policies are delayed.

This paper defines a sustainable development path as a balanced growth path with environmental conservation. In the framework of endogenous growth theory, it is known that a sustainable development path is optimal only if the following three conditions are satisfied: (1) the engine of economic growth is clean
(2) the assimilation capacity of the environment is high enough to endure the increasing environmental load with economic growth
and (3) the population has an egalitarian propensity with the elasticity of the marginal utility of consumption that is greater than or equal to one. While all of these three conditions are intuitively plausible, there are distinctions between the first two and the last one: the former can be obtained by our endeavors, whereas the latter concerns preference that is endowed rather than obtained. We show that this preference constraint can be relaxed if the production technology satisfies the condition that the elasticity of transformation to the production factor and the environmental service, after appropriate monotone transformation, is greater than one.

It is known that in an intertemporal competitive economy, a tradable permit system may not achieve efficiency without setting appropriate permit interest rates (i.e., rewards for holding permits). To find the rates, however, we need to know in advance the path of efficient permit prices, which is difficult to obtain. This study intends to solve this problem in two ways. First, we analyze a special case in which the permit interest rates are given by a simple rule. For example, if the marginal abatement cost of pollution emission is constant, then the appropriate rate is to equal the monetary interest rate. As is the case for global warming, if the damage is caused in the future far beyond the planning period of the environmental program, the appropriate rate coincides with the marginal self-recovery of environmental stock under certain conditions. As a second approach, we propose a tradable permit system with a permit bank, as a mechanism by which the permit interest rates are generated endogenously without governmental intervention other than the issuance of permits. However, we also show that this approach raises the problem of indeterminacy of the equilibrium.

We study the relation between dynamical systems describing the equilibrium behavior in dynamic games and those resulting from (single-player) dynamic optimization problems. More specifically, we derive conditions under which the dynamics generated by a model in one of these two classes can be rationalized by a model from the other class. We study this question under different assumptions about which fundamentals (e.g. technology, utility functions and time-preference) should be preserved by the rationalization. One interesting result is that rationalizing the equilibrium dynamics of a symmetric dynamic game by a dynamic optimization problem that preserves the technology and the utility function requires a higher degree of impatience compared to that of the players in the game.

This paper develops an optimum forest program for even-aged and multi-age forest management when the carbon sequestration service of a forest has value. It is shown that for even-aged forest management, the optimum rotation might be longer or shorter than when the carbon sequestration service is not considered. For multi-age forest management, it is shown that the optimum steady state is characterized by the optimum rotation for an even-aged forest. The optimum rotation is affected by how to evaluate the carbon release after harvesting, which is a central concern for the issue of "harvested wood products" in the United Nations Framework Convention on Climate Change. © 2011 Springer.

We show that the critical capital stock of the Dechert and Nishimura (1983) model is a decreasing and continuous function of the discount factor. We also show that the critical capital stock merges with a nonzero steady state as the discount factor decreases to a certain boundary value, and that the critical capital stock converges to the minimum sustainable capital stock as the discount factor increases to another boundary value. (C) 2011 Elsevier B.V. All rights reserved.

This paper evaluates tax schemes in a class of differential games. The results indicate that there are many tax schemes that support efficient resource usage, but each may fail to implement the targeted resource because of the multiplicity of equilibria. Since all of the equilibria are subgame perfect, it is difficult to predict which specific one arises. Care must then be taken in using a tax scheme as a remedy for the "tragedy of the commons." The advantages of other policy instruments (including command-and-control regulation and a tradable permit system) are also discussed.

Pollution from consumption and production is an inevitable part of economic processes. We employ a materials balance approach and develop an endogenous growth theory, with recycling activity, to examine the evolution of the economic and environment systems. This paper provides feasibility and optimality conditions for sustainable economic growth with rising environmental quality. The fundamental condition of feasibility is that the flow of natural resources, which eventually returns to the environment as waste and pollution, has a negative growth rate in the long run. (C)2007 Elsevier B.V. All rights reserved.

Exhaustion of a natural resource stock may be a rational choice for an individual and/or a community, even if a sustainable use for the resource is feasible and the resource users are farsighted and well informed on the ecosystem. We identify conditions under which it is optimal not to sustain resource use. These conditions concern the discounting of future benefits, instability of a social system or ecosystem, nonconvexity of natural growth function, socio-psychological value of employment, and strategic interaction among resource users. The identification of these conditions can help design policies to prevent unsustainable patterns of resource use.

This paper considers how environmental problems affect economic growth. In order to explain the relationship between the economy and the environment, we impose the law of mass conservation and its corollary, the mass balance principle, and consider pollution from both production and consumption sectors. Utilising a model which incorporates the material balance principle on endogenous growth theory, we obtain the following results. • Where environmental problems are not serious, optimal economic growth rates at a steady state rise as these problems become more severe. However, there is a threshold for the degree of their seriousness, beyond which the relationship is reversed, i.e., environmental problems lower optimal economic growth rates. • A similar relationship is found between the economic growth rates at social optimum and at a laissez-faire competitive equilibrium. The optimal growth rate is higher (lower) than the equilibrium growth rate if the degree of seriousness of environmental problems is below (above) a threshold. Copyright © 2006 Inderscience Enterprises Ltd.

This paper considers the timing of timber harvesting under uncertainty. The decision of a forest manager who maximizes the expected utility is formalized using a form of the closed loop control model. The stochastic optimization problem derived is very similar to the deterministic single stand problem known as the classical Faustmann formula, but there is a notable difference. Whilst optimal rotation periods are certain in the deterministic world, they are random variables in stochastic circumstances. Stochastic optimal rotation periods are difficult to include in forest economic analyses. Fortunately, under some technical assumptions, we can find a non-stochastic variable named "barrier" which corresponds to the optimal cutting stock size in the deterministic world. This paper shows that the von Neumann-Morgenstern forest manager cuts his/her trees when the stochastic stumpage values reach a certain amount, that is the barrier. Comparative statics on the barrier were conducted to evaluate the effect of planting costs and the degree of the manager's risk aversion. The results show that the barrier rises as planting costs increase or as the Arrow-Pratt index of absolute risk aversion becomes smaller.

This paper explains the hedonic method and reports our empirical research in which we applied this method to forests. Under some conditions, we were able to interpret the gradients of a hedonic equation regarding housing land prices as the marginal willingness to pay for characteristics of the living environment. Therefore it is possible to term the partial derivatives regarding a forest as the living environment values of a forest. Our research used a hedonic equation of quadratic form. One of the independent variables is the forested area around a housing lot. Most of the signs of the estimated parameters were consistent with those expected. Using this estimated equation, we computed the living environment value of forests in a certain area. As regards some forests, the value was extremely large when compared with the value based on forestry, whereas it did not seem so high when compared with the value of a forest being turned into housing lots. The paper also points out some problems involved with the hedonic method. We showed that the hedonic prices as equilibrium prices might be indeterminate when transaction costs such as moving expenses are introduced into SCOTCHMER'S model. We also discussed the fact that the estimated hedonic equation usually ignores some variables related to an individuals' perspective on the change of living environment. Our conclusion is that we should be careful when interpreting and/or using the estimated hedonic equation.

This paper examines properties of the profit-sharing afforestation contract from the viewpoint of the efficient use of forest resources under more practical assumptions than the previous paper. The profit-sharing afforestation contract is defined here as a contract that a planter rents a land during some periods for forest management and shares the proceeds from the deal of stumpage with the land owner in some ratio. The planter is considered as a public sector in the paper. Two assumptions in the previous papar are relaxed as follows : 1) the discount rate of the public sector is smaller than one of the land owner ; 2) externality of forests exists. As the result, the contract rotation periods and share rates are not unique, which is different from the previous result. But it is still possible to make contract of the socially optimal rotation. Also the paper shows that the socially optimal outcome does not result from the public sector's behavior to maximize the sum of its benefit and the land owner's profit when the externality exists. We conclude that the contract can be a useful tool for the public sector to realize the socially optimal use of forest resources if, in the contract, the public sector offers the socially optimal rotation period to the land owner and that therefore the public sector as a planter plays an important role.

This paper examines the characteristics of a profit-sharing reforestation contract from the viewpoint of the efficient use of forest resources. A profit-sharing reforestation contract is defined here as a contract where a planter rents the land for some period for forest management and shares the proceeds from the sale of stumpage with the land-owner in some ratio. The planter is considered to be a public sector in the paper. Under the four assumptions; namely 1) the world is in a deterministic steady state, 2) the stumpage proceeds function is concave and increasing during the rotation periods, 3) the discount rate of the land-owner coincides with that of the planter, and 4) the externality of forests does not exist; it is shown that the rotation periods and the share rates are unique. It also is shown that the rotation period is socially optimal and coincides with one derived from thefaustmannformula. © 1993, THE JAPANESE FORESTRY SOCIETY. All rights reserved.

This paper examines the influence of an increase in real wage rates on the rotation period and on the labor input, both of which are important input factors for forest management. First, profit functions were formulated around the Net Maximum Sustained Yield (NMSY) rule, the Internal Rate of Return (IRR) rule, the Fisherian rule, and the faustmann rule. Second, under the assumption that these profit functions are strongly concave, comparative statics were developed. The results were as follows: an increase in real wage rates 1) increases the optimal rotation period in the case of the IRR rule, 2) decreases the optimal labor input in the case of the Fisherian rule, and 3) causes at least one of the above results in the case of the NMSY and the faustmann rules. © 1991, THE JAPANESE FORESTRY SOCIETY. All rights reserved.