Global warming: Prices versus quantities from a strategic point of view

This paper investigates how the choices of the instruments affect the interactions in a stock externality game (global warming) between cartelized fossil fuel suppliers and consumers. More precisely, the paper studies the equilibria in Markov strategies in a dynamic game with each player choosing either the quantity or the price strategy including short-run first mover advantages. Indeed OPEC and its opponent IEA have tried both instruments in the past and play currently in quantities. Given such a non-competitive setting, both players should prefer the price instrument. Therefore, both players are expected to switch back to price and tax policies if global warming will be treated effectively. (C) 2011 Elsevier Inc. All rights reserved.