Externalities and Price Dynamics
We consider a dynamic two-country, two-commodity model in which each country specializes in the production of one commodity and trades with the other to consume both goods. The amount of capital used for production in one country generates externalities in the production of the other. This is one element of interdependence between the nations. Another source of interdependence comes from the market clearing prices, since the equilibrium price depends on their supply and consumption decisions are a function of the prices. We have a differential duopoly model to capture the strategic dynamic interaction between the countries. We work with a linear-logarithmic economy and find a closed loop Cournot-Nash equilibrium in linear stationary strategies. Higher consumption per unit of stock is associated with lower productivity or with negative externalities. The equilibrium evolution of stocks admits the possibility of monotonic or cyclical behavior, even in the long-run. The prices eventually reach a steady-state but may exhibit non-monotonic behavior, in the short-run.
|Date of creation:||01 Jan 1994|
|Date of revision:|
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