Abstract
The watershed ecological compensation is used as a policy instrument in China in order to reduce water pollution and attain watershed sustainability. In this paper, we construct a differential game between a local government and a profit maximizing local firm with one competitor in a watershed ecological compensation system. Then the optimal dynamic strategy is obtained by applying maximum principle. Finally, we investigate the influence of shadow prices on control variables and firm’s output in three different cases. This study focuses on how to reach a balance between the sustainable development of local economy and the effective protection of water resources from an ecological perspective for the local government, as well as on how to maximize the profit of the local firm in an ecological compensation system.
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