Towards an understanding of tradeoffs between regional wealth, tightness of a common environmental constraint and the sharing rules
Résumé
Consider a country with two regions that have developed differently so that their current
levels of energy efficiency differ. Each region's production involves the emission of
pollutants, on which a regulator might impose restrictions. The restrictions can be related to
pollution standards that the regulator perceives as binding the whole country (e.g., enforced
by international agreements like the Kyoto Protocol). We observe that the pollution standards
define a common constraint upon the joint strategy space of the regions. We propose a game
theoretic model with a coupled constraints equilibrium as a solution to the regulator's problem
of avoiding excessive pollution. The regulator can direct the regions to implement the solution
by using a political pressure, or compel them to employ it by using the coupled constraints'
Lagrange multipliers as taxation coefficients. We specify a stylised model that possesses those
characteristics, of the Belgian regions of Flanders and Wallonia. We analytically and
numerically analyse the equilibrium regional production levels as a function of the pollution
standards and of the sharing rules for the satisfaction of the constraint. For the computational
results, we use NIRA, which is a piece of software designed to min-maximise the associated
Nikaido-Isoda function.
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