This paper characterizes the optimal use of productive capacity and optimal investment in environmental quality when the latter has a positive impact on the production process. For the case of a single country, we find conditions under which capital should or should not be fully utilized, and investment in environmental quality should be positive or zero. We then extend the model to the case of two countries playing a non-cooperative dynamic game. The Nash equilibrium turns out to be a dominant-strategy equilibrium. Since this equilibrium is not Pareto efficient, we show how one country may bribe the other country to achieve a better outcome, for example, by refraining from full utilization of capacity. Under certain conditions, the optimal solution requires that a constant fraction of one country's income be used to bribe the other country to scale down its production.
Similar content being viewed by others
References
E. Dockner, S. Jorgensen, N.V. Long, G. Sorger, Differential Games in Economics and Management Science (Cambridge University Press, Cambridge, UK, 2000).
E. Dockner and N.V. Long, International pollution control: cooperative versus non-cooperative Strategies, Journal of Environmental Economics and Management 24 (1993).
A. Haurie and G. Zaccour, Differential game models of global environmental management, Annals of the International Society of Dynamic Games 2 (1995) 3–24.
S. Jorgensen and G. Zaccour, Time-consistent side payments in a dynamic game of downstream pollution, Journal of Economic Dynamics and Control 25(12) (2001) 1973–87.
M. Breton, G. Zaccour, M. Zahaf, A game-theoretic formulation of joint implementation of environmental projects, European Journal of Operational Research (2004) in press.
M. Breton, G. Zaccour, M. Zahaf, A Differential Game of Joint Implementation of Environmental Projects, Cahier du GERAD G-2004-10, Montreal (2004).
J.B. Krawczyk, An open-loop equilibrium in an environmental game with coupled constraints, Symposium of the International Society of Dynamic Games, Adelaide, 2000, Symposium Proceedings, pp. 325–339.
M. Tidball and G. Zaccour, An Environmental Game with Coupling Constraints, manuscript, GERAD, HEC, Montreal, 2004.
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Van Long, N. Capacity utilization and investment in environmental quality. Environ Model Assess 11, 169–177 (2006). https://doi.org/10.1007/s10666-005-9034-2
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10666-005-9034-2