A Time-Consistent Agreement in an Interregional Differential Game on Pollution and Trade

Abstract

This paper studies a transboundary pollution problem between two neighbour regions as a dynamic game. These two regions do not only share an environmental problem but they are also engaged in interregional trade. A good produced in one region is traded to the other which uses it as an input. This intermediate good is supplied by the former and demanded by the latter. The supply-demand scheme determines the price and production of the intermediate good. Thus total production is fixed in both regions, and the emissions of pollutants are also determined as a by-product. Cooperation cuts down production and trade, and in consequence the emissions of pollutants. Therefore, the environmental gain from cooperation overcomes the shrink in the interregional trade. An allocation mechanism to share the surplus of cooperation is defined, which guarantees a time-consistent agreement between both regions.

Dynamic Games in the Economics and Management of Pollution

“…Cabo et al [34] achieve the same result as Jørgensen and Zaccour [111] in a context of two countries that are trading an intermediate good and share an environmental concern. Cabo et al characterize and contrast two equilibria, feedback and open-loop, and a cooperative solution.…”

Regional Air Quality Management in China: A Case Study in the Pearl River Delta

“…Regional environment protection cooperation can improve the regional overall environment quality and increase the regional welfare [37,38]. However, for the individuals participating in the cooperation, some of them may have to sacrifice selfinterests in order to maximize the whole benefits [39].…”

On the strategic use of border tax adjustments as a second-best climate policy measure

“…For a model of dynamic interactions among countries that value environmental damages identically, see Yanase (2010). 2 Notable exceptions include Fernandez (2002), who explores empirically dynamic solutions to transboundary pollution through trade liberalization and environmental institutions for multilateral pollution control, Cabo et al (2001), who analyzed strategies that lead to a self-enforcing agreement on transboundary pollution problem within a North-South framework, and Cabo et al (2006), who study a model similar to ours, but with fixed output levels. Yanase (2007) studies a dynamic model with tariffs, where countries' actions contribute to a global public good (as opposed to a global public bad); in that setting he obtains the curious result that countries may want to encourage production from their trading partner.…”