Optimal control of a large dam with compound Poisson input and costs depending on water levels

This paper studies a discrete model of a large dam where the difference between lower and upper levels, $L$, is assumed to be large. Passage across the levels leads to damage, and the damage costs of crossing the lower or upper level are proportional to the large parameter $L$. Input stream of water is described by compound Poisson process, and the water cost depends upon current level of water in the dam. The aim of the paper is to choose the parameters of output stream (specifically defined in the paper) minimizing the long-run expenses that include the damage costs and water costs. The present paper addresses the important question \emph{How does the structure of water costs affect the optimal solution?} We prove the existence and uniqueness of a solution. A special attention is attracted to the case of linear structure of the costs. As well, the paper contributes to the theory of state-dependent queueing systems. The inter-relations between important characteristics of a state-dependent queueing system are established, and their asymptotic analysis that involves analytic techniques of Tauberian theory and heavy traffic approximations is provided.
Comment: 65 pages of 12pt font, 5 figures and 1 table. A shorter version of the paper is expected to be published in "Stochastics...". arXiv admin note: substantial text overlap with arXiv:0911.4228