Transboundary watershed pollution control and product market competition with ecological compensation and emission tax: a dynamic analysis

Product competition and pollution control are closely related to watershed environmental management, but existing literature rarely investigates them in an identical framework. Therefore, this paper develops a multiple differential game model to analyze product market competition and ecological compensation games between watershed regions based on the assumption that a region can choose four strategies to regulate its manufacturers while cooperating with other regions in the basin. Then, we solve the model and obtain a simultaneous equilibrium between the governments and manufacturers for the first time. The results show that the combination of emissions tax and ecological compensation results in the highest social welfare and water ecology for all regions in a basin. Furthermore, the ecological compensation rate independent of emissions tax policy and ecological compensation does not shift investment from downstream to upstream, but it can induce the upstream region to increase investment in management. In addition, if the governments impose an emissions tax, manufacturers' output in both regions decreases, and the upstream region is higher than in the downstream region.