The Core of an Economy With Multilateral Environmental Externalities

Abstract

When environmental externalities are international—i.e. transfrontier—they most often are multilateral and embody public good characteristics. Improving upon inefficient laissez-faire equilibria requires voluntary cooperation for which the game-theoretic core concept provides optimal outcomes that have interesting properties against free riding. To define the core, however, the characteristic function of the game associated with the economy (which specifies the payoff achievable by each possible coalition of players—here, the countries) must also specify in each case the behavior of the players which are not members of the coalition. This has been for a long time a major unsolved problem in the theory of the core of economies with many producers of a public good. Among the several assumptions that can be made in this respect, a plausible one is defined in this paper, for which it is then shown that the core is nonempty. The proof is constructive in the sense that it exhibits a solution (i.e., an explicit coordinated abatement policy ) that has the desired property of nondomination by any proper coalition of countries, given the assumed behavior of the other countries.