Nash Implementation of a Proportional Solution to International Pollution Control Problems

For a very general class of pollution control models involving strictly quasi-concave utility functions over consumption and environmental quality and strictly convex emission abatement cost functions, a proportional cost sharing mechanism is presented inspired by the ratio equilibrium introduced by7. It is shown that the proportional solution yields a cost efficient allocation of abatement efforts and that the resulting utility imputation always lies in the stand alone core of the cost sharing game. In order to decentralize the proportional cost sharing equilibrium, a financial compensation mechanism implementing the proportional solution in complete information Nash equilibrium is presented.     

Valuing nature in a general equilibrium

We explore the consequences of modeling the demand for environmental quality improvements as a fully integrated part of a general equilibrium demand system in an applied general equilibrium (or CGE) analysis. Demand for non-market goods depends on a full range of relative prices as well as environmental outcomes. We simulate the effects of reducing two air pollutants to improve human health and three ecosystem services provided to households. The ecosystem services make non-separable contributions to household utility. We find that willingness to pay measures of use-based ecosystem services are impacted by changes in demand for complementary market goods. Demand for these goods shifts due to pollution reductions that enhance ecosystem services. Partial equilibrium estimates of these use values can be measured with substantial error if they fail to account for the general equilibrium adjustments caused by pollution. Over 300 calibrations of the model identify the model features important to these errors. We find that effects on ecosystem services associated with non-use values have important implications for the feedback effects on use related measures of economic tradeoffs. This is due to how our model integrates market and non-market effects, reflecting the non-market services importance to general equilibrium market outcomes.     

Production, consumption, and general equilibrium with physical constraints

This paper analyzes the consequences of integrating the conservation laws of mass and energy into the microeconomic models of production, consumption, and general equilibrium. We show that abstract models and especially general equilibrium theory are consistent with these physical constraints, but most applied and environmental economic models are not. We analyze the consequences of physical conservation laws for substitution possibilities and show that these constraints limit the number of independent substitution processes but not the value of the substitution elasticities. Finally, we propose a method for integrating physical constraints into static microeconomic models with a minimum of changes.     

A framework for predicting personal exposures to environmental hazards

This paper presents a general framework for constructing a predictive distribution of the exposure to an environmental hazard sustained by a randomly selected member of a designated population. The individual’s exposure is assumed to arise from random movement through the environment, resulting in a distribution of exposure that can be used for environmental risk analysis. A specialization of the general framework is that of predicting human exposure to air pollution that can be used to develop models for such things as exposure to particulate matter; practical aspects of their construction are considered. These models can help answer questions such as what fraction of the population sustained ‘high’ levels of exposure for say 5 days in a row. The immediate implementation of the above framework takes the form of a computing platform referred to as pCNEM. This provides a facility for simulating exposures to airborne pollutants and is described in detail elsewhere. This paper considers some theoretical aspects underpinning probabilistic exposure models of this type, with the ideas illustrated in developing a model for predicting human exposure to PM ₁₀.     

Derived decision rules for pollution control in a general equilibrium space economy

This paper attempts to narrow the gap between economic theory and policy inthe field of environmental pollution control by expanding the traditional general equilibrium model to include the kind of spatial detail that is important for describing pollution. This model is then used to derive theorems which provide the basis for the development of spatially differentiated, tax-based decision rules. In spite of the fact that these rules require no information on either damage costs or control costs, they maintain many of the desirable properties of the more conventional informationally intensive tax policies.     

A Note on Environmental Federalism: Interpreting Some Contradictory Results

This paper reconciles some conflicting interpretations of recent literature on interjurisdictional environmental regulatory competition.[6], [7]present a model in which competition to attract investment by lowering environmental standards leads to a Pareto-optimal equilibrium. [3]; and [4]describe a model in which such competition can result in a suboptimal Nash equilibrium. While it would be possible to draw opposite policy implications from the two models regarding the appropriate degree of environmental federalism, such a conclusion would be incorrect. This paper reconciles the different results by showing that they depend in large part on monopoly profits and tax exporting, not the nature of the pollution externality or environmental federalism.     

Is Chinese trade policy motivated by environmental concerns?

This paper analyses whether China's export VAT rebates and export taxes are driven by environmental concerns. Since China struggles to enforce environmental regulation, trade policy can be used as a second-best environmental policy. In a general equilibrium model it is possible to show that the second-best export tax increases in a product's pollution intensity. The empirical analysis investigates whether the export tax equivalent of partial VAT rebates and export taxes are higher for products which are more pollution intensive along several dimensions. The results indicate that the VAT rebate rates are set in a way that discourages exports of water pollution intensive, SO₂ intensive and energy intensive products from 2007 on. Moreover, the conservation of natural resources such as minerals, metals, wood products and precious stones seems to be a key determinant of China's export VAT rebate rates. There is little evidence that export taxes are motivated by environmental concerns.     

The backward incidence of pollution control—some comparative statics in general equilibrium

The backward incidence of stronger pollution controls onto the factors of production is examined in a two sector (one polluting, one not), general equilibrium model. The real returns to labor and capital are found to move in opposite directions that depend on the factor intensity of the nonpolluting sector. The magnitudes of these effects are shown dependent upon the degree of factor intensity in that sector, the ease with which pollution can be removed from the effluent, the ease with which capital and labor can be substituted in either sector, and the price elasticities of demand for the sectors' products.     

A note on the use of property values in estimating marginal willingness to pay for environmental quality

The principle purpose of this paper is to discuss the theoretical background of the use of property values in estimating damage function. In the first part of the paper a general equilibrium model is constructed in which environmental quality differences are capitalized into land rents. In the second part of the paper some of the assumptions needed for this result are scrutinized, and it is found that they are hardly realistic. The main conclusion is, thus, that the study of property values cannot give viable estimates of the marginal willingness to pay for environmental quality.     

Household incidence of pollution control policies: A robust welfare analysis using general equilibrium effects

This study assesses the incidence of pollution control policies on households. In contrast to previous studies, we employ an integrated framework combining a multisector general equilibrium model with a stochastic dominance analysis using household-level data. We consider three policy instruments in a domestic emission trading system: (i) an output-based allocation (OBA) of permits; (ii) the use of the proceeds of permit sales to reduce payroll taxes (RPT); (iii) and the use of these proceeds to reduce consumption taxes instead (UCS). The general equilibrium results suggest that the return to capital is more negatively affected than the wage rate in all simulations, since polluting industries are capital intensive. Abstracting from pollution externalities, the dominance analysis suggests that all three policies have a normatively robust negative (positive) impact on welfare (poverty). Formal dominance tests indicate that RPT first-order welfare dominates OBA over all values of household incomes. UCS also first-order poverty dominates RPT for any choice of poverty line below $CAN 18,600, and poverty dominates for any poverty line (and thus welfare dominates) at the second order. Finally, while the three pollution control policies do not have a numerically large impact on inequality (in comparison to the base run), statistical tests indicate that inequality increases significantly more with OBA and RPT than with UCS.     

Optimization models for environmental pollution control: A synthesis

The optimization models presented here represent a synthesis between input-output analysis and mathematical programming models for environmental pollution control. The pivotal construct is a social cost for each unit of consumption; it is derived from the input-output analysis and is used in the objective function of the mathematical programming models which seek to optimize the final value of bill of goods and bads. The theory of optimization with relative bounded variables in nonlinear programming is developed and utilized.     

The economics of sequential choice applied to quasi-option value

This paper develops a general model that can be used to determine the value of sequential forecasts. The model is used (1) to examine the interacting effects of strategies for coping with environmental uncertainty, and (2) to explore the relationship between the theories of sequential choice and quasi-option value. The framework presented bridges these two schools of thought and provides a tool for evaluating one time (e.g., climate change) or repetitive (e.g., pollution) forecasts of environmental damage.     

Economic growth and environmental pollution under the max-min principle

This paper first analyzes the interactions between capital accumulation and environmental pollution under the program of sustained constant utility, which depends on per capita consumption and pollution, over all generations. Then the optimal program of economic growth is discussed. The implications of the constant-utility criterion (or the max-min principle) are compared with those of the utilitarian criterion which has been widely adopted in environmental pollution literature. Subsequently, the analysis incorporates pollution-abatement investment and exhaustible resources. We conclude that the max-min principle works fairly satisfactorily in this world.     

Pigou meets Mirrlees: On the irrelevance of tax distortions for the second-best Pigouvian tax

This paper extends the Mirrlees (1971) model of optimal income redistribution with optimal corrective taxes to internalize consumption externalities. Using general utility structures and exploring both linear and non-linear taxes, it is demonstrated that the optimal second-best tax on an externality-generating good should not be corrected for the marginal cost of public funds, since it equals one in the optimal tax system. In the optimum, distortions of income taxes are equal to marginal redistributional gains. If the government does not have access to a non-distortionary marginal source of finance, the marginal cost of public funds can be either larger or smaller than one depending on subjective preferences for income redistribution. The optimal second-best corrective tax is then either higher or lower than the Pigouvian level. The findings in this paper generalize and amend prior results based on representative-agent models, shedding new light on the weak double-dividend hypothesis, and on the welfare gains of recycling revenue from environmental taxes.     

Spatial effects and strategic behavior in a multiregional transboundary pollution dynamic game

We analyze a transboundary pollution differential game where pollution control is spatially distributed among a number of agents with predetermined spatial relationships. The analysis emphasizes, first, the effects of the different geographical relationships among decision makers; and second, the strategic behaviour of the agents. The dynamic game considers a pollution stock (the state variable) distributed among one large region divided in subregions which control their own emissions of pollutants. The emissions are also represented as distributed variables. The dynamics of the pollution stock is defined by a parabolic partial differential equation. We numerically characterize the feedback Nash equilibrium of a discrete-space model that still captures the spatial interactions among agents. We evaluate the impact of the strategic and spatially dynamic behaviour of the agents on the design of equilibrium environmental policies.     

Averting expenditure and the cost of pollution

The paper considers the relationship between the willingness to pay for environmental quality and averting expenditures—that is, the costs of measures undertaken in efforts to counteract the consequences of pollution. The models used assume perfect mobility among locations with different levels of environmental quality. The major results are: (1) Averting expenditures are not in general a good measure of willingness to pay; (2) averting expenditures are not always even a lower bound on willingness to pay; (3) even when averting expenditures are a lower bound, the difference between the level of such expenditures and willingness to pay cannot be attributed to the unavertible “aesthetic” consequences of pollution.     

International competitive displacement from environmental control The quantitative gains from methodological refinement

This paper demonstrates empirically the gain from adopting more general equilibrium approaches in projecting the effects on domestic output and international trade of environmental controls. The suggested models include a partial equilibrium case where all industries are treated independently, an intermediate case incorporating effects in supplying industries, and general equilibrium formulations based on alternative macroeconomic conditions. U. S. data is used to evaluate these models. Under both pollutor pays and subsidy financing schemes, moving from the simplest case to the intermediate model results in quite different industry projections. Including macroeconomic factors appears particularly important in the classical setting.     

Game theoretic analysis of environmental impact assessment system in China

Environmental impact assessment (EIA) system has been established in China since 1973. In present EIA cases, there are four participants in general: governments, enterprises, EIA organizations and the public. The public has held responsible for both social costs and social duties. The public supervises social costs produced by enterprises discharging pollutant in EIA. However public participation is mostly deputized by governments, which severely weaken the independence of the public as one participant in EIA. In this paper, EIA refers to the different attitudes of the participants whose optional strategies may be described by a proper game model. According to disfigurements in EIA, three sides (governments, enterprises, and EIA organizations) dynamic iterative game theory, dynamic game theory of incomplete information, and perfect Bayesian equilibrium theory to analyze the reciprocity relation among governments, EIA organizations and enterprises. The results show that in a short period, economic benefit is preponderant over social benefit. Governments and enterprises both do not want to take EIA to reveal social costs. EIA organizations’ income comes from enterprises and the collusions are built between them to vindicate economic benefit. In a long run, social benefit loss caused by environmental pollution must be recuperated sooner or later and environmental deterioration will influence the achievements of economic benefit, so both governments and enterprises are certain to pursue high social benefit and willing to take EIA, helpful to increase private benefit. EIA organizations will make fair assessment when their economic benefit are ensured. At present, the public as silent victims can not take actual part in EIA. The EIA system must be improved to break the present equilibrium of three sides, bringing the public to the equilibrium to exert public supervision.     

Pollution,welfare, and environmental policy in the theory of Comparative Advantage

Within a simple two-sector general equilibrium model it is shown how some well-known propositions of the neoclassical trade theory can be applied to countries with pollution-generating industries. Results are obtained not only under the assumption that the countries do not enforce any environmental policy but also for the case that one or each country implements an environmental price and standard system. In particular, several versions of the Theorem of Comparative Advantage with respect to environmental scarcity are derived, a theorem on welfare losses from trade, and an emission charge equalization theorem.     

Unemployment and the backward incidence of pollution control

This paper reexamines the backward incidence of pollution control using duality theory for a two-sector general equilibrium model in which the economy experiences large-scale unemployment and perfect capital mobility with a sector-specific rigid wage in the polluting sector. In this context it is shown that with stricter pollution controls the wage rate in the nonpolluting sector rises while the common rental rate falls. In addition, stricter pollution controls are shown to have an uncertain impact on national income.