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Allocating environmental costs among heterogeneous sources: The linear damage equivalent mechanism

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  • Arguedas, Carmen
  • Kranich, Laurence

Abstract

A group of firms has to divide the costs associated with environmental damages jointly generated as a by-product of their heterogeneous production activities. We propose a specific procedure to assign costs, the Linear Damage Equivalent Mechanism (LDE), which satisfies several appealing strategic and axiomatic properties. The LDE induces a strategic game that has an unambiguous noncooperative prediction, a unique Nash equilibrium which is also robust to coalitional deviations; moreover, the equilibrium is efficient. Among its other properties, we find that the LDE is immune to arbitrary changes in the units of account of the outputs.

Suggested Citation

  • Arguedas, Carmen & Kranich, Laurence, 1997. "Allocating environmental costs among heterogeneous sources: The linear damage equivalent mechanism," UC3M Working papers. Economics 6042, Universidad Carlos III de Madrid. Departamento de Economía.
    • Handle: RePEc:cte:werepe:6042
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    References listed on IDEAS

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    3. Louis J. Billera & David C. Heath, 1982. "Allocation of Shared Costs: A Set of Axioms Yielding A Unique Procedure," Mathematics of Operations Research, INFORMS, vol. 7(1), pages 32-39, February.
    4. Herve J. Moulin, 1987. "A Core Selection for Regulating a Single-Output Monopoly," RAND Journal of Economics, The RAND Corporation, vol. 18(3), pages 397-407, Autumn.
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