A differential game of international pollution control

Pollution is an inevitably by-product of production and damages the environment. The trade-off between production as a good and pollution as a bad over time can be analysed in the framework of a control model, which yields a path of emission charges that force the producers to behave in associally optimal way. Pollution that crosses national borders calls for international coordination of emission charges. In order to estimate the benefits of coordination one must use a realistic non-cooperative equilibrium concept. A natural extension of the control model implies unrealistic assumptions on information and commitment, and under-estimates the damage to the environment of not coordinating emission charges. In this note the more realistic subgame-perfect non-cooperative equilibrium is derived, which reinforces the case for international agreement og on pollution control.