Abstract
Economy prosperity has concurrently caused severe emission damages worldwide, which calls for strong abatement efforts from both nations and manufacturers. In this paper, we establish a two-stage game to investigate the policy selections of a foreign developed country (North) and a domestic developing country (South), and the response of a Southern manufacturer. The welfare-maximizing governments in the two countries participate in an announcement game of environmental policies where the South decides on whether or not to enforce an emission cap and the North chooses either a carbon tariff or no policy, after which the profit-seeking manufacturer reacts to make production strategies and distribute differentiated products to the two countries. Our analysis shows that under an emission cap, the manufacturer shrinks product quantities in both markets, cuts emissions, and suffers profit losses. A carbon tariff has similar impacts on the manufacturer except for unaffected domestic sales. In addition, equilibrium policy selections for the two governments depend on the degree of emission damage in the South: A moderate level of damage generates an equilibrium in the scenario of the unilateral tariff policy where the Northern welfare peaks and the Southern well-being is not the worst; a severe damage leads to a prisoner’s dilemma, since the two governments would arrive at an equilibrium in the bilateral-policy scenario, but it is dominated by a no-policy scheme. What is more, we find that a negotiation between the two governments is able to help them out of the dilemma and achieve a Pareto-improving outcome.
Highlights
The world has witnessed runaway success of economic growth in developing countries over the past decades
The degree of the environmental damage caused by the manufacturer’s production plays a critical role in the subgame perfect equilibrium of the announcement game the governments participate in: Under a comparatively small or moderate degree of emission damage, the governments arrives at an equilibrium under a tariff-only scheme where the North obtains the maximum welfare and the South is not the worst; when the damage becomes significant, the equilibrium points to the bilateral policy scenario, but it is dominated by the no-policy case, which brings about a prisoner’s dilemma for the two countries
We focus on the policy selections for the two welfare-maximizing governments who participate in an announcement game in the first stage
Summary
The world has witnessed runaway success of economic growth in developing countries over the past decades. We establish a two-stage game model: At first, the welfare-maximizing governments take part in an announcement game where each takes options of whether or not to implement the corresponding policy, namely, an emission cap in the South and a carbon tariff in the North; sequentially, the manufacturer reacts to make production strategy via pricing. The degree of the environmental damage caused by the manufacturer’s production plays a critical role in the subgame perfect equilibrium of the announcement game the governments participate in: Under a comparatively small or moderate degree of emission damage, the governments arrives at an equilibrium under a tariff-only scheme where the North obtains the maximum welfare and the South is not the worst; when the damage becomes significant, the equilibrium points to the bilateral policy scenario, but it is dominated by the no-policy case, which brings about a prisoner’s dilemma for the two countries.
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