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Economic and Political Equilibrium for a Renewable Natural Resource with International Trade

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  • Kong, Wen
  • Knapp, Keith C.

Abstract

International natural resources are typically subject to intense conflict, something likely to increase with population and economic growth. International cooperation over natural resources and the environment is the subject of a substantial literature (Kolstad), and is normally formulated as a game with given payoff functions for the individual countries. Within the literature on international rivers (the motivation here), Ambec and Sprumont (2002) assume a strictly increasing and strictly concave water benefit function, while Ambec and Ehlers (2007) assume that the benefit function exhibits satiation. Both of the papers are cooperative games. Ansink (2009) analyzes self-enforcing agreements on water allocation in a bargaining game. Fundamentally, the resource conflict might stem from the self-perception that an individual country will gain with additional resource allocation. This is reflected in the associated economic literature which is typically sector-level models with monotonic welfare functions. The overall objective of this work is to consider a broader setting such that cooperation over the natural resource might be joint self-interest for the political entities. The analytical framework is economic and political equilibrium when countries with joint resource access also trade produced goods/services. General equilibrium prices are functions of the water allocation, and these in turn identify country welfare as affected by water allocation. Political equilibrium is formulated as a game-theoretic problem. Here the welfare functions from the economic model are the payoff functions for individual countries, and standard solution concepts identify negotiated water allocations. A complete analytical solution is derived with this setup. Autarchic country welfare is increasing in water allocation as expected. However, with free trade the welfare functions can be non-monotone in some instances: starting from some initial allocation, it can be self-interest for one country to give up water to another country. Furthermore, there can be instances in which the highest level of welfare for one country is achieved with joint use of the resource as opposed to having a full allocation of the resource. At a minimum, where productivity coefficients imply a comparative advantage such that trade occurs, then the level of conflict as measured by the gains from an additional allocation of the resource will be reduced.

Suggested Citation

  • Kong, Wen & Knapp, Keith C., 2014. "Economic and Political Equilibrium for a Renewable Natural Resource with International Trade," 2014 Annual Meeting, July 27-29, 2014, Minneapolis, Minnesota 170591, Agricultural and Applied Economics Association.
  • Handle: RePEc:ags:aaea14:170591
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    References listed on IDEAS

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    1. Victor Ginsburgh & Michiel Keyzer, 2002. "The Structure of Applied General Equilibrium Models," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262571579, March.
    2. Erik Ansink & Arjan Ruijs, 2008. "Climate Change and the Stability of Water Allocation Agreements," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 41(2), pages 249-266, October.
    3. Alistair Ulph, 2004. "Stable International Environmental Agreements with a Stock Pollutant, Uncertainty and Learning," Journal of Risk and Uncertainty, Springer, vol. 29(1), pages 53-73, July.
    4. Ansink, Erik & Gengenbach, Michael & Weikard, Hans-Peter, 2012. "River Sharing and Water Trade," Climate Change and Sustainable Development 122860, Fondazione Eni Enrico Mattei (FEEM).
    5. Barrett, Scott, 1994. "Self-Enforcing International Environmental Agreements," Oxford Economic Papers, Oxford University Press, vol. 46(0), pages 878-894, Supplemen.
    6. Ansink, Erik & Houba, Harold, 2016. "Sustainable agreements on stochastic river flow," Resource and Energy Economics, Elsevier, vol. 44(C), pages 92-117.
    7. Ambec, Stefan & Ehlers, Lars, 2008. "Sharing a river among satiable agents," Games and Economic Behavior, Elsevier, vol. 64(1), pages 35-50, September.
    8. repec:wsi:igtrxx:v:14:y:2012:i:01:n:s0219198912500028 is not listed on IDEAS
    9. Carraro, Carlo & Siniscalco, Domenico, 1993. "Strategies for the international protection of the environment," Journal of Public Economics, Elsevier, vol. 52(3), pages 309-328, October.
    10. Krugman, Paul R., 1979. "Increasing returns, monopolistic competition, and international trade," Journal of International Economics, Elsevier, vol. 9(4), pages 469-479, November.
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    Keywords

    International Relations/Trade; Public Economics; Resource /Energy Economics and Policy;

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