Strategic Behavior and the Environment > Vol 4 > Issue 1

Regulating Environmental Externalities through Public Firms: A Differential Game

Davide Dragone, Department of Economics, University of Bologna, Italy, Luca Lambertini, ENCORE, University of Amsterdam, The Netherlands, Arsen Palestini, MEMOTEF, Sapienza University of Rome, Italy,
Suggested Citation
Davide Dragone, Luca Lambertini and Arsen Palestini (2014), "Regulating Environmental Externalities through Public Firms: A Differential Game", Strategic Behavior and the Environment: Vol. 4: No. 1, pp 15-40.

Published: 22 Apr 2014
© 2014 D. Dragone, L. Lambertini and A. Palestini
Environmental Economics,  Industrial organization,  Economic theory
Pollutionpublic firmsoligopolyMarkov perfect strategy

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In this article:
1. Introduction
2. The Setup
3. Social Planning
4. The Mixed Market
5. The Cournot-Nash Game Among Profit-Seeking Firms
6. Policy Assessment
7. Conclusions


We investigate the possibility of using public firms to regulate polluting emissions in a Cournot oligopoly where production generates pollution and public firms are less efficient than private ones. In a differential game we compare (i) the Markov-Perfect Nash equilibrium under social planning; (ii) the Markov Perfect Nash equilibrium in a mixed setup where public firms coexist with profit-seeking agents; (iii) the Cournot-Nash game among profit-seeking firms. In a mixed market, profit-seeking firms internalize the externality generated by production, and social welfare is the highest. We conclude that the creation of a mixed market can be desirable for the regulation of environmental externalities.