Environmental protection mechanisms and technological dynamics

Antoci, Angelo and Borghesi, Simone and Russu, Paolo (2011): Environmental protection mechanisms and technological dynamics. Forthcoming in: Economic Modelling

Abstract

The paper proposes a new financial mechanism that could be implemented to protect the environment of a tourist region. For this purpose, we investigate the potential consequences of two financial activities, issued by the local government (\emph{G}) of a region\emph{\ R}, which work like contracts between \emph{G} and, respectively, visitors of\emph{\ R }and firms operating in\emph{\ R}. According to these contracts, agents who decide to visit \emph{R }(firms that decide to adopt an environmental friendly technology) have to buy an option that entitle them to get a partial or total reimbursement if environmental quality in \emph{R} turns out to be sufficiently low (high), namely, below (above) a given predetermined threshold level.

Using a two-population evolutionary game model, we analyze the dynamics emerging from the model and prove that under such fund rising mechanism the virtuous equilibrium (in which all firms adopt the pollution-free technology and all agents choose to visit the region) is always locally attractive. Furthermore, we show that the attraction basin of the poverty trap equilibrium (in which no firm adopts the clean technology and no tourist comes the region) can be decreased by raising the reimbursement offered by the local government to the visitors. Finally, using numerical simulations, it can be shown that the dynamics of the model may give rise to another attractive stationary state in correspondence of the environmental quality threshold determined by the government, as well as to a limit cycle that oscillates around the threshold.

• Item Type: MPRA Paper
• Language: English
• Keywords: environmental protection; financial instruments; technological innovation; evolutionary dynamics
• Subjects: Q - Agricultural and Natural Resource Economics ; Environmental and Ecological Economics > Q5 - Environmental Economics > Q56 - Environment and Development ; Environment and Trade ; Sustainability ; Environmental Accounts and Accounting ; Environmental Equity ; Population Growth; C - Mathematical and Quantitative Methods > C7 - Game Theory and Bargaining Theory > C73 - Stochastic and Dynamic Games ; Evolutionary Games ; Repeated Games

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