Tax schemes in a class of differential games

This paper evaluates tax schemes in a class of differential games. The results indicate that there are many tax schemes that support efficient resource usage, but each may fail to implement the targeted resource because of the multiplicity of equilibria. Since all of the equilibria are subgame perfect, it is difficult to predict which specific one arises. Care must then be taken in using a tax scheme as a remedy for the “tragedy of the commons.” The advantages of other policy instruments (including command-and-control regulation and a tradable permit system) are also discussed. I am indebted to Gerhard Sorger, Koji Shimomura, and two anonymous referees for their helpful comments. The detailed suggestions of one of the referees in particular have markedly improved the paper. Any remaining errors are mine. Partial financial support from MEXT KAKENHI(11730017, 18078004) is also gratefully acknowledged.