Towards an understanding of tradeoffs between regional wealth, tightness of a common environmental constraint and the sharing rules

Boucekkine, R., Krawczyk, J.B. and Vallée, T. (2010) Towards an understanding of tradeoffs between regional wealth, tightness of a common environmental constraint and the sharing rules. Journal of Economic Dynamics and Control, 34(9), pp. 1813-1835. (doi: 10.1016/j.jedc.2010.02.004)

Abstract

Consider a country with two regions that have developed differently so that their current levels of energy efficiency differ. Each region's production involves the emission of pollutants, on which a regulator might impose restrictions. The restrictions can be related to pollution standards that the regulator perceives as binding the whole country (e.g., imposed by international agreements like the Kyoto Protocol). We observe that the pollution standards define a common constraint upon the joint strategy space of the regions. We propose a game theoretic model with a coupled constraints equilibrium as a solution to the regulator's problem of avoiding excessive pollution. The regulator can direct the regions to implement the solution by using political pressure, or compel them to employ it by using the coupled constraints’ Lagrange multipliers as taxation coefficients. We specify a stylised model of the Belgian regions of Flanders and Wallonia that face a joint constraint, for which the regulator wants to develop a sharing rule. We analytically and numerically analyse the equilibrium regional production levels as a function of the pollution standards and of the sharing rules. We thus provide the regulator with an array of equilibria that he (or she) can select for implementation. For the computational results, we use NIRA, which is a piece of software designed to min-maximise the associated Nikaido–Isoda function.

• Item Type: Articles
• Status: Published
• Refereed: Yes
• Glasgow Author(s) Enlighten ID: Boucekkine, Prof Raouf
• Authors: Boucekkine, R., Krawczyk, J.B., and Vallée, T.
• Subjects: H Social Sciences > HB Economic Theory
• College/School: College of Social Sciences > Adam Smith Business School > Economics
• Journal Name: Journal of Economic Dynamics and Control
• ISSN: 0165-1889
• Published Online: 01 March 2010