A Differential Game on the Management of Natural Capital subject to Emmissions from Industry Production

Magnus Hennlock

Swiss Journal of Economics and Statistics (SJES), 2005, vol. 141, issue III, pages 411-436

Abstract: A nonlinear differential game is developed with the industry and the government as two actors that act independently of each other with different objectives and different time preferences in the second best solution. The industry is concerned about the profit stream from the production of a consumption good when choosing the optimal path of investment rate in physical capital. The current emissions flow generated by production has negative long-run effects on the future renewable natural capital stock. The objectives of the government concern the industry profit stream as well as the evolution of the natural capital stock when choosing the optimal path of tax rate per unit emissions flow. Tax revenue is used for investments to restore and sustain the natural capital stock, which evolves according to a stochastic process. The subgame perfect feedback Nash equilibrium strategies for the industry investment rate and the government tax rate are identified and compared to the optimal controls in the first best solution.

Keywords: Differential games; feedback Nash equilibrium; renewable natural resources; pollution; biodiversity (search for similar items in EconPapers)
JEL-codes: C72 C73 Q28 Q57 (search for similar items in EconPapers)
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