A DIFFERENTIAL GAME OF INTERNATIONAL POLLUTION-CONTROL

Pollution is an inevitable by-product of production and damages the environment. The trade-off between production as a good and pollution as a bad over time can be analysed in the framework of a control model, which yields a path of emission charges that force the producers to behave in a socially optimal way. Pollution that crosses national borders calls for international coordination of emission charges. In order to estimate the benefits of coordination one must use a realistic non-cooperative equilibrium concept. A natural extension of the control model implies unrealistic assumptions on information and commitment, and under-estimates the damage to the environment of not coordinating emission charges. In this note the more realistic subgame-perfect non-cooperative equilibrium is derived, which reinforces the case for international agreements on pollution control.