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Public debt, pollution and environmental taxes: Nash and Stackelberg equilibria

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  • Halkos, George
  • Papageorgiou, George

Abstract

Public debt accumulation and pollution result to disutility while time path must be sustainable. Policy weapons available to the government with regard to public debt is the generation of primary surpluses to sustain public debt while concerning pollution environmental taxation is expected to reduce emissions. In this paper, we address these factors in a simple dynamic game in order to find ways at which the notions of public debt, pollution, and taxation are interrelated. The starting point of the model is the identity of current account as the equation of motion of public debt, while public debt is considering as a stock and the stress of the regulator is to raise the nation’s primary surplus. Nash and Stackelberg differential game solutions are used to explore the strategic interactions. In the Nash equilibrium establishment of cyclical strategies, during the game between the polluters in one hand and the government on the other, requires that the discount rate of the polluters must be greater than government’s discount rate. That is the polluters must be more impatient than the government. In the case of hierarchical setting, the analytical expressions of the strategic variables and the steady state value of public debt stock are provided. Furthermore, we found the analytical expressions of the value functions, making, therefore, the policy implications an easy task. Finally, we found the conditions under which the conflict is more intensive, in the two cases of equilibrium, according to the shadow price of the environmental damages.

Suggested Citation

  • Halkos, George & Papageorgiou, George, 2017. "Public debt, pollution and environmental taxes: Nash and Stackelberg equilibria," MPRA Paper 81982, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:81982
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    References listed on IDEAS

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    1. Mouez Fodha & Thomas Seegmuller, 2014. "Environmental Quality, Public Debt and Economic Development," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 57(4), pages 487-504, April.
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    5. George Halkos & John Hutton, "undated". "Acid Rain Games in Europe," Discussion Papers 93/12, Department of Economics, University of York.
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    7. Wirl Franz, 1995. "The Cyclical Exploitation of Renewable Resource Stocks May Be Optimal," Journal of Environmental Economics and Management, Elsevier, vol. 29(2), pages 252-261, September.
    8. Halkos, George, 2011. "Cyclical and constant strategies in renewable resources extraction," MPRA Paper 34654, University Library of Munich, Germany.
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    11. Mouez Fodha & Thomas Seegmuller, 2014. "Environmental Quality, Public Debt and Economic Development," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 57(4), pages 487-504, April.
    12. Halkos, George E. & Papageorgiou, George J., 2017. "A dynamic game with feedback strategies for internalizing externalities," Economic Analysis and Policy, Elsevier, vol. 55(C), pages 147-157.
    13. Clark, Colin W & Clarke, Frank H & Munro, Gordon R, 1979. "The Optimal Exploitation of Renewable Resource Stocks: Problems of Irreversible Investment," Econometrica, Econometric Society, vol. 47(1), pages 25-47, January.
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    Cited by:

    1. George, Halkos E. & George, Papageorgiou J. & Emmanuel, Halkos G. & John, Papageorgiou G., 2019. "Environmental regulation and economic cycles," Economic Analysis and Policy, Elsevier, vol. 64(C), pages 172-177.

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    More about this item

    Keywords

    Public debt; Pollution; Taxation; Dynamic games; Nash equilibrium; Stackelberg equilibrium.;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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