Regulation of pollution in a Cournot equilibrium
Working paper
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Date
2008-06Metadata
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- Discussion papers (SAM) [657]
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 EconomicsSeries
Discussion paper2008:12