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Computing business-as-usual with a representative agent and a pollution externality


  • Shiell, Leslie
  • Lyssenko, Nikita


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 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.

Suggested Citation

  • 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.
  • Handle: RePEc:eee:dyncon:v:32:y:2008:i:5:p:1543-1568

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    References listed on IDEAS

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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," OxCarre Working Papers 093, Oxford Centre for the Analysis of Resource Rich Economies, University of Oxford.
    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. Shiell, Leslie & Lyssenko, Nikita, 2014. "Climate policy and induced R&D: How great is the effect?," Energy Economics, Elsevier, vol. 46(C), pages 279-294.
    4. Sebastián J. Miller & Sebastián Galiani & Omar O. Chisari, 2013. "Optimal Adaptation and Mitigation to Climate Change in Small Environmental Economies," IDB Publications (Working Papers) 4668, Inter-American Development Bank.
    5. Radulescu, Doina & Stimmelmayr, Michael, 2010. "The impact of the 2008 German corporate tax reform: A dynamic CGE analysis," Economic Modelling, Elsevier, vol. 27(1), pages 454-467, January.
    6. 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.

    More about this item

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics


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