Coalitions in transboundary pollution reduction

Abstract

During emission reductions countries render 'services' to each other by reducing transboundary pollution, which should be recognized as an additional source of benefit. Since transboundary pollution fluxes are often significant, the underestimation of this factor can substantially affect the choice of emission reduction strategies and, eventually, restrain pollution reduction. This factor is a specific feature of the transboundary pollution problem that, in the taxonomy of M~iler (1990), relates to the case of regional reciprocal externalities. Cooperation in the case of regional reciprocal externalities has been often studied, explicitly or implicitly, in terms of cooperative games with transferable utilities (TU). One reason for this is that within this approach side payments are allowed, which theoretically give higher gains to participants as compared to the approach with non-transferable utilities (NTU). Another reason is that the theory of NTU games is not yet sufficiently developed as compared with the theory of TU games. But the standard TU approach to regional environmental regulation shows significant drawbacks. Discussing the analyses of the Canadian-American agreement on the Columbia River by Krutilla (1966, 1968) and of the Mexican-American agreement on the Colorado River by Kneese (1988), M~iler (1990) points out that the countries do not use side payments in the explicit form. Moreover, the amounts of implicit 'side payments' seem to be in contradiction with the criteria of economic benefits, producing an impression of irrationality of the countries' choices (MNer, 1990). In this paper the TU approach is abandoned in favour of the NTU approach to treat the case of regional reciprocal externalities. From the viewpoint of the NTU game, an 'irrational' behaviour of a participant occurs when his preferences involve hidden goals, while his implicit side payments favourably affect the other participants' (expected) choices of strategies with respect to these hidden goals. The NTU approach becomes immune to 'irrational' behaviour if it allows consideration of the participants' utilities reflecting their respective hidden goals through the above mechanism of transposed preferences. Non-transferability of utilities generally means incommensurability of