OPTIMALITY OF PRE-EMPTING REGULATIONS ON NATURAL RESOURCE USE

Firms are often confronted with regulations on their productive and commercial activities. In many instances a firm can take various actions to pre-empt regulations. This article determines the optimality of pre-emptive action for a firm subject to natural resource regulation. The regulation may be either fixed or relative to the production history. Dependent on the type of regulation, a firm can pre-empt by terminating its current use of resources and converting to other use or by building up the input use or output history in the period prior to regulation. It is shown that the optimal pre-emption decision depends on the extent and perceived probability of regulation, on the rate of discount and on technological characteristics of the production process including the alternative use of the resource. Copyright Blackwell Publishing Ltd/University of Adelaide and Flinders University 2006..