Economics, Game Theory and International Environmental Agreements

The Ca' Foscari Lectures

Henry Tulkens

• Publisher: WSPC
• Year: 2019
• eBook ISBN: 9789813141247
• Topic: Economics
• Subtopic: Environmental Economics
• Index: Economics

The science and management of environmental problems is a vast area, comprising both the natural and social sciences, and the multidisciplinary links often make these issues challenging to comprehend. Economics, Game Theory and International Environmental Agreements: The Ca' Foscari Lectures aims to introduce students to the multidimensional character of international environmental problems in general, and climate change in particular.

Ecology, economics, game theory and diplomacy are called upon and brought together in the common framework of a basic mathematical model. Within that framework, and using tools from these four disciplines, the book develops a theory that aims to explain and promote cooperation in international environmental affairs.

Other books on the topic tend to be research-oriented volumes of various papers. Instead, this is a book that offers a reasonably-sized synthesis of the multidimensional societal problems of transfrontier pollution, particularly of climate change. It uses mathematical modeling of economic and game theory concepts to examine these environmental issues and demonstrate many results in an accessible fashion. Readers interested in understanding the links between ecology and economics, as well as the connection between economics and institutional decision-making, will find in this text not only answers to many of their queries but also questions for further thinking.

Contents:

• Foreword (by Carlo Carraro)
• Two Introductory Notions
• The Reference Economic-Ecological Model
• Economic Theory Concepts
• Game Theory Concepts
• The Global Externality Game (GEG)
• The Dynamic GEG
• The Dynamic GEG in Numbers
• Coalitional Stability in the GEG
• Policy and Diplomacy: A GEG Interpretation of the UNFCCC Process
• General Conclusion

Readership: Students and researchers who are interested in learning more about transboundary environmental issues, such as transfrontier pollution and climate change, from an environmental economics and game theory perspective. Environmental Economics;Environmental Externalities;Climate Change;Game Theory;?-core;Dynamic Games;International Agreements;UNFCCC Process;Kyoto Protocol0 Key Features:

• Offers a reasonably sized synthesis of the multidimensional societal problems of transboundary pollution, particularly of climate change
• The author is a leading researcher in the field of climate change, particularly in the area of cooperative arguments based on game theory
• The in-depth analysis and advanced ideas contained in the book are presented in an accessible fashion by the author, who has 25 years of research experience in the field of environmental economics

Lecture 1

TWO INTRODUCTORY NOTIONS

The purpose and the message

Economics and ecological science provide appropriate descriptions of the environmental phenomena that are of concern in these lectures, among which is climate change. In this and the next lecture, a basic framework is laid down within which the argument of the following ones is developed and serves as a reference throughout. Here, just two elementary but essential notions of economics and ecological science are covered which, together with the reader’s general knowledge, are sufficient for proceeding in the next lecture to the construction of an “economic-ecological” model, admittedly simple but rich enough to provide an integrated understanding of the realities involved.

Plan

Can the environment be treated as an economic good?

Ecological transfer functions

Conclusion

Lecture 1

Two Introductory Notions

1.1 The environment: An economic good?

The connection between environment and economics is not an obvious one. While this is, to some extent, due to misconceptions of what economics is about, it is also due to the state of economic science itself. Only a fairly recent adaptation of the discipline, which started from 1950 onwards, has allowed its contribution to become significant for the environmental problems dealt with in these lectures. In today’s terms, the connection can be made fruitfully, as I suggest below, by first clarifying the meaning of some of the keywords involved — such as environment, pollution, externalities, and even economic commodities — and putting them in an appropriate perspective. The perspective I choose is the one offered by the economic theory called “general equilibrium”, the corner stone of the entire discipline.

Environment and social sciences

If the “environment” were composed only of static elements, it would probably not be a subject matter of interest for social sciences in general; only physical sciences would be called for to describe and explain it the way it is. By contrast, it is environmental change that makes the environment a relevant domain of enquiry for sciences concerned with human behavior, and this from two points of view: on the one hand, mankind adapts to such change when it occurs, and on the other hand, mankind engages and often succeeds in influencing or even inducing environmental change.

These are also the two dimensions along which a meaningful environmental economics can develop. Indeed, (re)allocation of resources is involved in an essential way, possibly in considerable amounts, in either dimension: as environmental changes most often entail costs and/or benefits to humans, on the one hand, adapting to them either requires resources or may provide new ones. On the other hand, influencing or correcting environmental change always entails costs, as the actions involved also require resources to achieve them.

The body of environmental economics thus rests on two legs: one is the economics of whether and how society reacts to environmental change, and the other is the economics of whether and how society generates environmental change. Much of its interest is in the proper understanding of how these two aspects are interrelated.

Environment and pollution

As a preliminary question, one might ask whether there is a need for a concept such as an “environmental good”, that would be specific to the field. I do not think there is such a need, and I shall devote the rest of this subsection to argue that the existing apparatus of current economics is quite adequate for both handling the reality under consideration and bringing this reality within the realm of resource allocation reasoning.¹

Current environmental concerns bear mostly on pollution phenomena, pollution being typically the result of human actions whereby the environment is changed — degraded in most cases. In reverse, there are also actions that improve the environment, which either compensate for previous degradation or just increase some of its original qualities.

While pollution situations do not exhaust the environmental domain, they nevertheless constitute an important part of it. This finds its justification in the fact that environmental degradations have motivated to a large extent the ecological opinion movements since the early sixties as well as the actions of political groups such as green parties, through which societal concerns for the environment are expressed. In most of the subsequent developments, I shall use the vocabulary whereby pollution phenomena are described as well as their effects on the physical environment to illustrate the economic construct. In brief, I shall deal with “environmental pollution”.

Environment and externalities

Environmental pollution phenomena have been recognized in the economics literature for a long time. Most often they were ranked under the general heading of “externalities”, a concept originally of broader scope than what I wish to cover here with environmental pollution.² Yet, the currently accepted textbook notion of externalities³ serves fairly well my purpose. I propose the following:

Definition 1.1. Externalities are interactions among economic agents, bearing on each other’s consumption sets, preferences and/or production sets, that do not result from exchanges.

Indeed, for environmental pollution to be dealt with in the context of general equilibrium theory, as I have announced above, this definition of externalities allows one to account for them in terms that are compatible with the language and concepts of this theory.⁴ Among those, the notion of “commodity”⁵ and the specification of a “commodity space” are basic. Externalities were not included in this specification when it was first introduced in 1954⁶ but a suggestion made by Arrow (1970) corrected for that and opened the way to letting externalities become part of general equilibrium analysis. The novelty of Arrow’s suggestion was in the representation he chose to give to externalities, namely to treat them as commodities in the same sense as the ordinary commodities were defined in 1954, and thus to simply include externalities as additional dimensions in the commodity space.⁷

Externalities as two-dimensional commodities

Upon close scrutiny, Arrow’s commodity called “externality” has a special characteristic: it is of a two-dimensional nature. One dimension refers to the generation of the externality — what is generated and by whom, while the other dimension refers to the reception of it — what is received or perceived, and by whom. In environmental pollution vocabulary, this corresponds to, respectively, emitted pollutants as they accompany the economic activity, and ambient pollutants as they are present in the environment and hence inflicted on those who are affected by them. This two-fold view may be seen as an extension of the early tools of analysis of externalities, an extension specifically due to the environmental applications that have burgeoned over the last four decades.⁸

The justification for this treatment of externalities as a two-fold economic good is not only that it has descriptive merits. More importantly, it points to two quite distinct roles of the agents involved: on the one hand, emissions are an unintentional⁹ by-product (often a joint product) of specific actions taken by their generators. On the other hand, reception does not result from actions by the receiving agents: it occurs passively.¹⁰

To reinforce the justification of the distinction introduced here, let me mention that when I shall describe economic-ecological models in more detail below, it will appear that emissions are of the nature of what is called private goods in economic theory, whereas ambient magnitudes most often have characteristics of public goods, local or global. This in turn leads to the further distinctions that follow.

Directional vs. diffuse externalities

Elaborating on ambient pollution, distinction ought to be made according to the number of simultaneous recipients, potential or actual.¹¹ A pollutant may indeed affect just one, ¹² or a few, or many agents simultaneously, possibly all individuals in the world or even agents that are yet to be born! Thus, externalities often have a “public good” property in the sense of “non-rivalry” (a terminology introduced by Musgrave (1968)): the fact that some agents are affected by it does not modify the amount by which other agents are affected. Actually, the term “public bad” would be more appropriately descriptive of the detrimental character of ambient pollution. “Good” applies well, though, to abatement. In that sense, clean-up activities are equivalent to the production of a public good.

This leads one to create some additional vocabulary: when the externality is such that receiving it in some amount by an agent implies that as much less is received by the other agents, the term directional externality captures the phenomena well. In other words, a directional externality is exhaust...

Table of contents

• Cover
• Halftitle
• Series Editors
• Title
• Copyright
• Foreword
• Preface
• About the Author
• Contents
• Lecture 1 Two Introductory Notions
• Lecture 2 The Economic-Ecological Reference Model
• Lecture 3 Economic Theory Concepts
• Lecture 4 Game Theory Concepts
• Lecture 5 The Global Externality Game I: Its γ-core
• Lecture 6 The Global Externality Game II: Its CT Solution
• Lecture 7 The Dynamic Global Externality Game
• Lecture 8 The Dynamic Global Externality Game in Numbers: The CWS Model
• Lecture 9 Internal Coalitional Stability and the Global Externality Game
• Lecture 10 The UNFCCC Process: An Economic and Game Theoretic Interpretation
• References
• Author Index
• Subject Index