Domestic environmental policy and international cooperation for global commons

Abstract

The paper analyzes the strategic behavior of several countries engaged in capital accumulation, pollution mitigation, and environmental adaptation in the context of an environmental common good. Both cooperative and non-cooperative strategies are discussed. The non-cooperative strategy is a dynamic game in which each country makes its own environmental decision following the open-loop Nash equilibrium. The cooperative social planner problem assumes an international environmental agreement in force. The non-cooperative and cooperative solutions are compared in the symmetric case of two countries and extended to several identical countries. It is shown that the non-cooperative strategy in multi-country world leads to over-production, over-consumption, over-pollution, and over-adaptation.