Shallow Lakes and Loading Constraints: A Normative Approach

The economic-ecological system of shallow lakes is characterized by nonlinearity and hysteresis. A Pigouvian tax is traditionally used to reconcile stakeholders’ interests, but it does not guarantee an oligotrophic state of the lake. A different approach to pollution control is that of quantitative regulation. In our model, an environmental authority introduces a cap on the growth rate of phosphorus stock to save the lake. We get three main results. First, the adoption of a quantity constraint affects stakeholders’ decisions not only when it is binding but even when it is still slack. Indeed, the community finds it optimal to anticipate the effect of the latent constraint at the beginning of the planning horizon. As a result, phosphorus loading may even increase in intermediate periods, before the constraint binds. Second, our model shows that an optimal management path emerges in the intermediate stages, and the cap can drive the shallow lake toward the oligotrophic state. Finally, results crucially depend on the fine-tuning of the constraint. If initial conditions allow, the saddle path converging to the oligotrophic steady state can be approached. Therefore, moderate policy changes have long-term effects on the health of the lake.