Handbook of Environmental and Resource Economics
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Handbook of Environmental and Resource Economics

Edited by Jeroen C.J.M. van den Bergh

This major reference book comprises specially commissioned surveys in environmental and resource economics written by an international team of experts. Authoritative yet accessible, each entry provides a state-of-the-art summary of key areas that will be invaluable to researchers, practitioners and advanced students.
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Chapter 70: Game Theory in Environmental Policy Analysis

H. Folmer and A. de Zeeuw


Henk Folmer and Aart de Zeeuw 1. Introduction Game theory deals with the strategic analysis of multi-agent decision problems. Such problems frequently occur in environmental economics. In the case of transboundary pollution a country’s decision whether or not to join an international agreement or to comply with a joint environmental policy depends on the decisions of the other countries involved. The formulation and implementation of domestic environmental policy by the government involves the (expected) decisions of the agents subject to the envisaged policy. Firms, countries and regions compete using environmental issues as strategic instruments. As can be easily recognized in the above examples, a game is made up of a set of players, a set of strategies available to each player whenever called upon to make a decision, and the payoff that results to each player for each combination of strategies. The payoffs are based on the assumption that the players have a von Neumann-Morgenstern ranking over the set of possible outcomes of the game. The important characteristics of a game are: 0 0 The order of play. If all players make their decisions one after another, we speak of a sequential-move game. Alternatively, if the players have t o make their decisions simultaneously, then the game is called a simultaneous-move game. The information available to any player at any point during the game. Most common in economics, including environmental economics, are games of perfect recall. This means that it is assumed that no player forgets any information he once...

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