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Regulation of pollution in a Cournot equilibrium

Mathiesen, Lars
Working paper
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URI
http://hdl.handle.net/11250/163146
Date
2008-06
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  • Discussion papers (SAM) [638]
Abstract
In the traditional Cournot model producers influence each other’s decisions through revenue earned in the product market. Rosen (1965) introduced the notion of a coupled constraints equilibrium which allowed players to affect their rivals’ strategy space as well. Krawczyk (2005) applied this idea to the regulation of environmental pollution where a cap on aggregate

emissions implies a constraint across firms’ activity levels. He solved the model with a

diagonalization algorithm obtaining linear convergence. We formulate this problem as a

complementarity problem and apply a Newton algorithm obtaining a quadratic convergence.

We show that the conditions under which this model has a unique solution and the algorithm

computes the solution are analogous to those for the traditional Cournot model.
Publisher
Norwegian School of Economics and Business Administration. Department of Economics
Series
Discussion paper
2008:12

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