Abstract
This paper presents a differential game of pollution management. The industrial sector chooses the level of investment to maximize net revenue and the government imposes a tax and uses the tax proceeds for pollution abatement operations. The feedback of pollution on capital accumulation and the effect of the level of pollution on the natural rate of decay are incorporated in the model. We solve for the (subgame perfect) feedback Nash equilibrium solution of the game, and obtain explicitly the game equilibrium accumulation dynamics of capital and pollution. Various properties of the equilibrium follow from this closed form solution. It is found that the game equilibrium output path exhibits continual oscillation about a long run equilibrium level. Finally, when we allow a constant rate of decay, damped output cycles appear.
The author would like to thank two anonymous referees for their extremely helpful comments.
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Yeung, D.W.K. (1995). Pollution-Induced Business Cycles: A Game Theoretical Analysis. In: Carraro, C., Filar, J.A. (eds) Control and Game-Theoretic Models of the Environment. Annals of the International Society of Dynamic Games, vol 2. Birkhäuser, Boston, MA. https://doi.org/10.1007/978-1-4612-0841-9_14
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DOI: https://doi.org/10.1007/978-1-4612-0841-9_14
Publisher Name: Birkhäuser, Boston, MA
Print ISBN: 978-1-4612-6917-5
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