A Stackelberg–Nash–Cournot Equilibrium in a Pollution Reduction Scheme

Abstract

This paper presents a Stochastic Stackelberg–Nash–Cournot Equilibrium model with continuous market demand distribution to examine the effectiveness of ambient charges as an effective policy measure for reducing nonpoint source pollution in a hybrid scheme. To do so, we consider the supply side of an energy market with hybrid technology that competes in an oligopoly market setting. Within such a setting, each power plant or firm uses a mix of fossil fuels (F) and renewable energy sources (R) to generate power at any given time. The demand for electricity is not realized at the time when the firm (leader) makes the decision. The competition between the two energy sources available to leader is assumed to be of Nash–Cournot equilibria, implying that they use one energy source to generate electricity, whilst holding the other energy source as a constant when the followers reactions are known. Based on the assumption that the demand function is affine and power plants cost functions are quadratic, we obtain the Stackelberg–Nash–Cournot equilibrium. Hence, our analysis provides an interesting insight into the effectiveness of using ambient charges, within the context of a Stochastic Stackelberg–Nash–Cournot competition, as an environmental economic policy measure when included within a robust hybrid scheme. From an economical point of view, this allows pollutants to develop specific control technologies by undertaking research and development (R&D) measures or production processes to maintain emissions standards in a hybrid scheme. From a policy implementations point of view, the environmental authority can use the pollution abatement technology ratio to set ambient charges and industry specific pollutant quantitative limits subject to technological variations.