Computing business-as-usual with a representative agent and a pollution externality
AbstractComputing the no-policy equilibrium (business-as-usual) in a representative-agent (RA) model is complicated by the presence of a pollution externality, since simple optimization internalizes the pollution cost. Many researchers use ad-hoc methods, but there is no way to know how reliable these are. A solution is presented in which the RA model is divided into N identical components, each identified with its own sub-agent. Sub-agents play a dynamic game, leading to a Nash equilibrium. For sufficiently large N, this approach keeps most of the pollution cost external, and in the limit it is equivalent to a myopic-firms model, in which the entire cost is external. This approach has the advantage of theoretical consistency, and empirical applications indicate that it is easily implemented.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Economic Dynamics and Control.
Volume (Year): 32 (2008)
Issue (Month): 5 (May)
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Other versions of this item:
- Nikita Lyssenko & Leslie M. Shiell, 2004. "Computing Business-as-Usual with a Representative Agent and a Pollution Externality," Working Papers 0409E, University of Ottawa, Department of Economics.
- D62 - Microeconomics - - Welfare Economics - - - Externalities
- Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics
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