Dynamic Games in Environmental Economics and Management

Abstract

Environmental economics thinks about the optimal use of natural resources, like water, oil, the air we breathe, or the physical environment we live in. The fundamental question is the problem of externalities: costs that are generated by one group of actors, which have to be borne by another group. Time scales play an important role: the benefits of the industrial revolution were realised immediately, but we are still dealing with the costs of the concomitant CO 2 pollution. The evolution of underlying stock variables can be influenced to some extent, at a cost, and their management therefore presents an investment problem.Dynamic games come into the story naturally, as they provide the right framework to analyse actions of multiple actors that generate costs and benefits over time. To provide an impetus to research efforts on dynamic issues of competition and cooperation in environmental management, the editors had invited contributions to a Special Issue of Dynamic Games and Applications with exclusive focus on environmental economics and management. Eleven such contributions are collected in the following pages. Six of them can roughly be classified as dealing with pollution problems, while the other five address more general resource problems. The whole spectrum of dynamic games is present: differential games, population games, overlapping generation games, repeated games, and mean-field games.The seminal contribution of Engelbert Dockner and Ngo Van Long [6] analysed a differential game of countries that have to cope with global pollution, and two of the articles in this Special Issue took it as their starting point. Yanase and Kamei [12] extend the Dockner-Van Long model by allowing the two countries to trade. They find that under frictionless trade, the same levels of environmental and social welfare are achieved under international cooperation, open-loop Nash equilibrium, and linear Markov-perfect Nash equilibrium, and these free-trade policies outperform noncooperative environmental policies in the absence of trade. Positive trade costs can reverse this outcome in certain configurations.