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An Evolutionary Approach to Pollution Control in Competitive Markets

Author

Listed:
  • Ratul Lahkar

    (Department of Economics, Ashoka University)

  • Vinay Ramani

    (Indian Institute of Management, Visakhapatnam)

Abstract

We consider a large population of firms in a market environment. The firms are divided into a finite set of types, with each type being characterized by a distinct private cost function. Moreover, the firms generate an external cost like pollution in the production process. As a result, the Nash equilibrium outcome is not socially optimal. We propose an evolutionary implementation mechanism to achieve the socially optimal outcome. In contrast to the classical Pigouvian pricing and the VCG mechanism, evolutionarily implementation does not require the planner to know or elicit any private information from firms. Hence, it is informationally parsimonious. By imposing a tax equal to the current external damage being imposed by a firm, the planner can guide the evolution of the society towards the social optimum. The imposition of the tax generates a potential game whose potential function is the social welfare function of the model. Evolutionary dynamics converge to the maximizer of this function thereby evolutionarily implementing the social welfare maximizer.

Suggested Citation

  • Ratul Lahkar & Vinay Ramani, 2021. "An Evolutionary Approach to Pollution Control in Competitive Markets," Working Papers 68, Ashoka University, Department of Economics.
    • Handle: RePEc:ash:wpaper:68
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    File URL: https://dp.ashoka.edu.in/ash/wpaper/paper68_0.pdf
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    References listed on IDEAS

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    Cited by:

    1. Florian Wagener, 2022. "Dynamic Games in Environmental Economics and Management," Dynamic Games and Applications, Springer, vol. 12(3), pages 747-750, September.
    2. Ratul Lahkar & Sayan Mukherjee & Souvik Roy, 2022. "A Deterministic Approximation Approach to the Continuum Logit Dynamic with an Application to Supermodular Games," Working Papers 79, Ashoka University, Department of Economics.

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