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 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 InfoPaper provided by University of Ottawa, Department of Economics in its series Working Papers with number 0409E.
Length: 31 pages
Date of creation: 2004
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representative agent; externality; pollution;
Other versions of this item:
- Shiell, Leslie & Lyssenko, Nikita, 2008. "Computing business-as-usual with a representative agent and a pollution externality," Journal of Economic Dynamics and Control, Elsevier, vol. 32(5), pages 1543-1568, May.
- D62 - Microeconomics - - Welfare Economics - - - Externalities
- Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics
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