Dynamic Games in Transboundary Pollution Problems: An Air Quality Approach

Abstract

We address a problem of transboundary pollution from the perspective of air quality, which enables us to modelize the welfare function of the countries as a product of the air quality stock and their production. In this setting we analyse and compare Markovian optimal policies under cooperation and under Stackelberg and Nash competition, studying also the cases where one of the countries does not value the stock of air quality as an important component to increase the welfare of its population. We show that in the Markovian Stackelberg equilibria the evolution of the air quality is better and that, regardless of their roles, all the countries achieve a higher value of discounted welfare than in the Markov Perfect Nash equilibria. The possibility of the leader of select the optimal strategy knowing how the opponent will react works against him, leading him to obtain levels of welfare lower than those obtained by the follower.