The Effect of Uncertainty on Pollution Control Policy

Athanassoglou, Stergios (2009): The Effect of Uncertainty on Pollution Control Policy. Unpublished.

Abstract

I study a class of differential games of pollution control with profit functions that are polynomial in the global pollution stock. Given an emissions path satisfying mild regularity conditions, a simple polynomial ambient transfer scheme is exhibited that induces it in Markov-perfect equilibrium (MPE). Proposed transfers are a polynomial function of the difference between actual and desired pollution levels; moreover, they are designed so that in MPE no tax or subsidy is ever levied. Their applicability under stochastic pollution dynamics is studied for a symmetric game of polluting oligopolists with linear demand. I discuss a quadratic scheme that induces agents to adopt Markovian emissions strategies that are stationary and linear-decreasing in total pollution. Total expected ambient transfers are always non-positive and increase linearly in volatility and the absolute value of the slope of the inverse demand function. However, if the regulator is interested in inducing a constant emissions strategy then, in expectation, transfers vanish.

• Item Type: MPRA Paper
• Language: English
• Keywords: differential games, stochastic dynamics, nonpoint source pollution, policy design
• Subjects: H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H21 - Efficiency; Optimal Taxation; H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H23 - Externalities; Redistributive Effects; Environmental Taxes and Subsidies; C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C73 - Stochastic and Dynamic Games; Evolutionary Games; Repeated Games

References

H. Benchenkroun and N. V. Long (1998), ``Efficiency Inducing Taxation for Polluting Oligopolists,'' {\em Journal of Public Economics}, 70, 325-342.

F. Cochard, M. Willinger, and A. Xepapadeas (2005), ``Efficiency of Nonpoint Source Pollution Instruments: An Experimental Study,'' {\em Environmental and Resource Economics}, 30, 393-422.

J.C. Cox, J.E. Ingersoll, and S.A. Ross (1985), ``A Theory of the Term Structure of Interest Rates," {\em Econometrica}, 53, 385–407.

\bibitem{d00} E. Dockner, S. Jorgensen, N. V. Long, and G. Sorger (2000), {\em Differential Games in Economics and Management Science}, Cambridge University Press.

E. Dockner and N. V. Long (1993), ``International Pollution Control: Cooperative vs. Noncooperative Strategies,'' {\em Journal of Environmental Economics and Management}, 24, 13-29.

E. Dockner, N. V. Long, and G. Sorger (1996), ``Analysis of Nash Equilibria in a Class of Capital Accumulation Games,'' {\em Journal of Economic Dynamics and Control}, 20, 1209-1235.

P. K. Dutta and R. Radner (2009), ``A Strategic Analysis of Global Climate Change: Theory and Some Numbers,'' {\em Journal of Economic Behavior and Organization}, in press.

\bibitem{dy04} S. Dyrting (2004), ``Evaluating the Noncentral Chi-Square Distribution for the Cox-Ingersoll-Ross Process,'' {\em Computational Economics}, 24, 35-50.

B. Homlstrom (1982), ``Moral Hazard in Teams,'' {\em Bell Journal of Economics}, 13, 324-340.

\bibitem{k05} L. Karp (2005), ``Nonpoint Source Pollution Taxes and Excessive Tax Burden,'' {\em Environmental and Resource Economics}, 31, 229-251.

L. Karp and J. Livernois (1994), ``Using Automatic Tax Charges to Control Pollution Emissions,'' {\em Journal of Environmental Economics and Management}, 27, 38-48.

G. Kossioris, M. Plexousakis, A. Xepapadeas, A. de Zeeuw, and K.-G. Maler (2008), ``Feedback Nash Equilibria for Non-Linear Differential Games in Pollution Control,'' {\em Journal of Economic Dynamics and Control}, 32, 1312-1331.

K.-G. Maler, A. P. Xepapadeas, and A. J. de Zeeuw (2003), ``The Economics of Shallow Lakes,'' {\em Environmental and Resource Economics}, 26, 429--439.

R. Merton (1975), ``An Asymptotic Theory of Growth Under Uncertainty,'' {\em Review of Economic Studies}, 42, 375-393.

K. Segerson (1988), ``Uncertainty and Incentives for Nonpoint-Source Pollution Control," {\em Journal of Environmental Economics and Management}, 15, 87-98.

J. Spraggon (2002), ``Exogenous Targeting Instruments as a Solution to Group Moral Hazards,'' {\em Journal of Public Economics}, 84, 427-456.

S. Tsutsui and K. Mino (1990), ``Nonlinear Strategies in Dynamic Duopolistic Competition with Sticky Prices,'' {\em Journal of Economic Theory}, 52, 136-131.

A.P. Xepapadeas (1992), ``Environmental Policy and Dynamic Nonpoint-Source Pollution,'' {\em Journal of Environmental Economics and Management}, 23, 22-39.