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Computing Business-as-Usual with a Representative Agent and a Pollution Externality

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  • Nikita Lyssenko

    (Carleton University)

  • Leslie M. Shiell

    ()
    (Department of Economics, University of Ottawa)

Abstract

Computing 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 agent. 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 Info

Paper provided by University of Ottawa, Department of Economics in its series Working Papers with number 0409E.

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Length: 31 pages
Date of creation: 2004
Date of revision:
Handle: RePEc:ott:wpaper:0409e

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Keywords: representative agent; externality; pollution;

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References

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Cited by:
  1. Armon Rezai & Frederick van der Ploeg & Cees Withagen, 2012. "The Optimal Carbon Tax and Economic Growth: Additive versus Multiplicative Damages," CEEES Paper Series CE3S-05/12, European University at St. Petersburg, Department of Economics.
  2. Rezai, Armon & van der Ploeg, Frederick, 2014. "Abandoning Fossil Fuel: How Fast And How Much?," CEPR Discussion Papers 9921, C.E.P.R. Discussion Papers.
  3. Armon Rezai, 2011. "The Opportunity Cost of Climate Policy: A Question of Reference," Scandinavian Journal of Economics, Wiley Blackwell, vol. 113(4), pages 885-903, December.

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