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Optimal abatement and taxation for internalizing externalities: A dynamic game with feedback strategies

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  • Halkos, George
  • Papageorgiou, George

Abstract

In this paper we consider a dynamic nonzero-sum game between the polluting firms and the authorities. Although the proposed game is not easily solvable for the feedback case, i.e., it is not the linear quadratic case of game and not a degenerated case, we calculate explicitly a stationary feedback equilibrium. In the proposed game the regulator has the ability to turn the optimal allocation of their efforts between abatement and taxation of the polluting firms. During the game, the regulator’s criterion is the minimization of the total discounted costs, while the criterion of the polluting firms is their utility maximization. Next, sensitivity analyses regarding the efficiency parameters of both players are provided. The conclusions are that a farsighted regulator should put much effort in abatement measures (instead of taxation measures) as well as in the improvement of abatement efficiency.

Suggested Citation

  • Halkos, George & Papageorgiou, George, 2016. "Optimal abatement and taxation for internalizing externalities: A dynamic game with feedback strategies," MPRA Paper 74467, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:74467
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    References listed on IDEAS

    as
    1. George Halkos & John Hutton, "undated". "Acid Rain Games in Europe," Discussion Papers 93/12, Department of Economics, University of York.
    2. Shimomura, Koji, 1991. "The feedback equilibria of a differential game of capitalism," Journal of Economic Dynamics and Control, Elsevier, vol. 15(2), pages 317-338, April.
    3. Konstantinos I. Evangelinos & George E. Halkos, 2002. "Implementation Of Environmental Management Systems Standards: Important Factors In Corporate Decision Making," Journal of Environmental Assessment Policy and Management (JEAPM), World Scientific Publishing Co. Pte. Ltd., vol. 4(03), pages 311-328.
    4. George Halkos, 1994. "Optimal abatement of sulphur emissions in Europe," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 4(2), pages 127-150, April.
    5. Halkos, George E. & Jones, Nikoleta, 2012. "Modeling the effect of social factors on improving biodiversity protection," Ecological Economics, Elsevier, vol. 78(C), pages 90-99.
    6. Halkos, George & Papageorgiou, George, 2014. "Controlling polluting firms: Nash and Stackelberg strategies," MPRA Paper 58947, University Library of Munich, Germany.
    7. George E. Halkos & Konstantinos I. Evangelinos, 2002. "Determinants of environmental management systems standards implementation: evidence from Greek industry," Business Strategy and the Environment, Wiley Blackwell, vol. 11(6), pages 360-375, November.
    8. Dockner,Engelbert J. & Jorgensen,Steffen & Long,Ngo Van & Sorger,Gerhard, 2000. "Differential Games in Economics and Management Science," Cambridge Books, Cambridge University Press, number 9780521637329, January.
    9. Halkos, George E., 1993. "Sulphur abatement policy: Implications of cost differentials," Energy Policy, Elsevier, vol. 21(10), pages 1035-1043, October.
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    Cited by:

    1. Michael L. Polemis & Thanasis Stengos, 2019. "Does competition prevent industrial pollution? Evidence from a panel threshold model," Business Strategy and the Environment, Wiley Blackwell, vol. 28(1), pages 98-110, January.

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    More about this item

    Keywords

    Differential games; Feedback equilibrium; Taxation; Pollution abatement.;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • Q50 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - General
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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