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A TIME-CONSISTENT AGREEMENT IN AN INTERREGIONAL DIFFERENTIAL GAME ON POLLUTION AND TRADE

Francisco Cabo (), Elena Escudero and Guiomar Martin-Herran
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Francisco Cabo: Dpto. Economía Aplicada (Matemáticas), Avda. Valle Esgueva, 6. 47011-Valladolid, Spain;
Elena Escudero: Dpto. Fundamentos del Análisis Económico, Universidad de Valladolid, Spain

International Game Theory Review (IGTR), 2006, vol. 08, issue 03, 369-393

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.

Keywords: Cooperative and non-cooperative games; differential games; dynamic individual rationality; time-consistent agreement; trade and environment; transboundary pollution; JEL Classification Number: C73; JEL Classification Number: F18; JEL Classification Number: F42; JEL Classification Number: Q25 (search for similar items in EconPapers)
JEL-codes: B4 C0 C6 C7 D5 D7 M2 (search for similar items in EconPapers)
Date: 2006
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DOI: 10.1142/S0219198906000977

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