Figure 1 : Optimal Loading and Expected Pollutant Stock under Certainty for Various σv


Notes: The left graph displays the optimal loading c = BX +1 + b as a function of the critical value Xc, the right graph
displays the next period’s expected pollutant stock E[Xt+1] as a function of Xc. The constant target level Xtarget, the
expected level in the next period if a manager were to assume that the system is in either state with certainty (i.e. above
or below the critical value without a chance of switching) is added as a dotted line to the right panel. For limXc→-∞
and limXc→∞, the expected stock approaches this target level Xtarget. However, if this target level is close to the
critical level X , additional precaution is optimal to avoid transition to the undesirable state. Parameter values used
follow Peterson et al. [25] where: k = 1.5, δ = 0.99, B = 0.1, b = 0.02, r = 0.2, σv2 = 0.02.
24
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