Computing Business-as-Usual with a Representative Agent and a Pollution Externality

Nikita Lyssenko () and Leslie Shiell

No 0409E, Working Papers from University of Ottawa, Department of Economics

Abstract: Computing the no-policy equilibrium (business-as-usual) in a representative-agent (RA) model is complicated by the presence of a pollution externality, since simple optimization internalizes the pollution cost. Many researchers use ad hoc methods, but there is no way to know how reliable these are. A solution is presented in which the RA model is divided into N identical components, each identified with its own agent. Agents play a dynamic game, leading to a Nash equilibrium. For sufficiently large N, this approach keeps most of the pollution cost external, and in the limit it is equivalent to a myopic-firms model, in which the entire cost is external. This approach has the advantage of theoretical consistency, and empirical applications indicate that it is easily implemented.

Keywords: representative agent; externality; pollution (search for similar items in EconPapers)
JEL-codes: D62 Q5 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2004
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Citations: View citations in EconPapers (3)

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Journal Article: Computing business-as-usual with a representative agent and a pollution externality (2008)
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