Pollution Control in Open Economies: Implications of Within-period Interactions for Dynamic Game Equilibrium

This paper examines a two-country, dynamic game model of pollution control in the presence of economic interactions between countries within a period, as well as the environmental interaction between periods (i.e., a change in the stock of global pollution). These economic interactions emerge because of changes in the terms of trade of polluting goods or the market share of domestic polluting industries. It is shown that if within-period externalities exist, a noncooperative equilibrium may result in a smaller stock of global pollution in the steady state than does international cooperation. Moreover, the properties of equilibrium paths depend on the direction and size of such externalities. In addition, trigger strategy equilibria that achieve the outcome of the collusive solution are examined.