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, davide.dragone@unibo.it Luca Lambertini, ENCORE, University of Amsterdam, The Netherlands, luca.lambertini@unibo.it Arsen Palestini, MEMOTEF, Sapienza University of Rome, Italy, luca.lambertini@unibo.it
 
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. http://dx.doi.org/10.1561/102.00000042

Published: 22 Apr 2014
© 2014 D. Dragone, L. Lambertini and A. Palestini
 
Subjects
Environmental Economics,  Industrial organization,  Economic theory
 
Keywords
C73D43D62L13L32Q50
Pollutionpublic firmsoligopolyMarkov perfect strategy
 

Article Help

Share

Download article
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
Appendix
References

Abstract

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.

DOI:10.1561/102.00000042