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The Core of an Economy with Multilateral Environmental Externalities

In: Public goods, environmental externalities and fiscal competition

Author

Listed:
  • Parkash Chander

    (National University of Singapore)

  • Henry Tulkens

Abstract

When environmental externalities are international - i.e. transfrontier - they most often are multilateral and embody public good characteristics. Improving upon inefficient laissez-faire equilibria requires voluntary cooperation for which the game-theoretic core concept provides optimal outcomes that have interesting properties against free riding. To define the core, however, the characteristic function of the game associated with the economy (which specifies the payoff achievable by each possible coalition of players- here, the countries) must also reflect in each case the behavior of the players which are not members of the coalition. This has been for a long time a disputed issue in the theory of the core of economies with externalities. Among the several assumptions that can be made as to this behavior, a plausible one is defined in this paper, for which it is shown that the core of the game is nonempty. The proof is constructive in the sense that it exhibits a strategy (specifying an explicit coordinated abatement policy and including financial transfers) that has the desired property of nondomination by any proper coalition of countries, given the assumed behavior of the other countries. This strategy is also shown to have an equilibrium interpretation in the economic model.

Suggested Citation

  • Parkash Chander & Henry Tulkens, 2006. "The Core of an Economy with Multilateral Environmental Externalities," Springer Books, in: Parkash Chander & Jacques Drèze & C. Knox Lovell & Jack Mintz (ed.), Public goods, environmental externalities and fiscal competition, chapter 0, pages 153-175, Springer.
    • Handle: RePEc:spr:sprchp:978-0-387-25534-7_10
    DOI: 10.1007/978-0-387-25534-7_10
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    Keywords

    Nash Equilibrium; Public Good; Cooperative Game; Noncooperative Game; Ratio Equilibrium;
    All these keywords.

    JEL classification:

    • C71 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Cooperative Games
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q25 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Water

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