Coordinating Carbon Emissions via Production Quantities: A Differential Game Approach

Gila E. Fruchter and Hussein Naseraldin
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Gila E. Fruchter: The Graduate School of Business Administration, Bar-Ilan University, Ramat Gan 5290002, Israel
Hussein Naseraldin: Department of Industrial Engineering and Management, ORT Braude College, Karmiel 2161002, Israel

Games, 2021, vol. 12, issue 1, 1-16

Abstract: Production emissions in the industrial sector are a major source of environmental pollution. In this paper, we explore how emission considerations are integrated with production decisions. We develop a dynamic model consisting of two firms located in the same industrial park, which satisfies exogenously given demands in separate markets. The two firms can build up or rundown stocks (full backlogging), both of which are costly. The emission cost depends on the total output of the two firms. We develop Nash equilibrium feedback strategies, where each firm decides on its output based on its inventory or the inventories of both. We also develop a social planning solution where decisions are centralized. We present the analytic results for the total profits in these settings. The results show the benefits of a decentralized approach over a centralized one, provided there is a mechanism for coordination. Finally, emission costs are compared for the various solution concepts.

Keywords: decentralized; centralized; industrial parks; differential games; emission (search for similar items in EconPapers)
JEL-codes: C C7 C70 C71 C72 C73 (search for similar items in EconPapers)
Date: 2021
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