Game Theory and International Environmental Cooperation

Game Theory and International Environmental Cooperation

New Horizons in Environmental Economics series

Michael Finus

The book investigates various strategies to provide countries with an incentive to accede, agree and comply to an international environmental agreement (IEA). Finus shows that by integrating real world restrictions into a model, game theory is a powerful tool for explaining the divergence between ‘first-best’ policy recommendations and ‘second-best’ designs of actual IEAs. For instance he explains why (inefficient) uniform emission reduction quotas have played such a prominent role in past IEAs despite economists’ recommendations for the use of (efficient) market-based instruments as for example emission targets and permits. Moreover, it is stated, that a single, global IEA on climate is not necessarily the best strategy and small coalitions may enjoy a higher stability and may achieve more.

Chapter 16: Summary and Conclusions

Michael Finus

Subjects: economics and finance, environmental economics, game theory, environment, environmental economics

Extract

After important terms, the notation of this book and the structure of game theory had been laid out in Chapter 2, we started out in Chapter 3 by analyzing four simple matrix games: the prisoners’ dilemma, the chicken, the assurance and the no-conflict games. The analysis first focused on two countries only (Sections 3.2–3.5) and was then extended to N countries. Depending on the cost–benefit structure of an abatement policy, either no cooperation, cooperation among some countries or cooperation among all countries could be explained. Though these matrix games are rather simple by their nature, basic features of the coalition models in Chapters 13–15 could already be depicted. In Chapter 3 it was also shown that though there is no external coordinator endowed with the power to enforce an IEA, and hence countries must play a correlated Nash equilibrium, coordination may improve upon the non-cooperative outcome. This result was demonstrated with the help of the chicken game. It was pointed out that future research should derive conditions under which coordination is possible and that it should scrutinize whether it is possible to transform a game such that coordination can be applied more effectively. Moreover, retrospectively of the coalition formation models, it seems promising to look at the effect of coordination in an N-country world. Due to the complexity of this issue, it seems promising to look first at some of the reduced coalition formation games of Chapter 15. Due to their simple structure,...

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