Guido Candela () (University of Bologna and The Rimini Centre for Economic Analysis, Rimini, Italy.) Massimiliano Castellani () (University of Bologna and The Rimini Centre for Economic Analysis, Rimini, Italy.) Maurizio Mussoni () (University of Bologna and The Rimini Centre for Economic Analysis, Rimini, Italy.)
Abstract
“Ecological monsters” (“eco-monsters”) can be the bizarre, but legal, outcome of rational choices made by two agents: (i) a firm whose investments depend on Governmental permits; (ii) a policy maker having the discretionary power on the permits. This paper will determine the existence conditions which create a legal “eco-monster”. The model consists of a sequential noncooperative game with equilibrium in terms of positive expected firm profits and policy maker net balance ending up with a non-zero-sum game and a double failure: (i) a market failure, when the firm interrupts and abandons the investment, and (ii) a public failure, when the policy maker can not avoid the creation of “eco-monsters”. Policy implications and partisan party effects are explored: for certain parameters values, the economic policy can be ineffective in decreasing the “ecomonsters” frequency as a paradoxical, but rational, outcome in a stochastic framework, with real options and environmental externalities. JEL Classifications: C72-D62-D73
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Publisher Info
Paper provided by Rimini Centre for Economic Analysis in its series Working Paper Series with number
07-08.