Transfrontier Pollution: Cooperative and NonCooperative Solutions

A dynamic model of transfrontier pollution is constructed to analyze production and residual emission decisions for two countries under cooperative and noncooperative behavior. Each country must allocate marginal resources between more commodity production or more residual (emission) reduction. while each country produces a different commodity (say, nickel and electricity), the jointly-produced residual (say, sulfur oxide) is identical. After emission and transport, the residuals are subject to deposition and possible accumulation in both countries. Cooperative and noncooperative behavior may lead to steady state equilibria. A comparison of the equations defining such equilibria permits the identification of corrective taxes, which depend not only on marginal damage but on the rates of transport, degredation and discount as well. While the cooperative solution is Pareto superior to the noncooperative solution, the necessary corrective taxes may not be adopted without side payments between countries. Movement toward the cooperative solution might be facilitated by an international control agency with the authority to impose emission standards on sources of transfrontier pollution. It is unlikely that sovereign states would vest unlimited control over domestic emissions to an international agency, and alternative regimes based on negotiated emission standards, emission taxes and marketable pollution permits are considered. Based on a subjective assessment of resource and transactions costs, a system of marketable emission permits may be least cost.