# Cost of pollution control is local and asymmetri

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Special Topic – Policies for Pollution Control (20 points)

This question resembles the game we introduced in class but involves asymmetric incentives between the two players.

Countries A and B are negotiating a treaty on reducing a pollutant that both emit. Each country faces the following decisions:

1. Will you sign the treaty?

2. Will you reduce emissions accordingly if you sign the treaty?

To answer this question, we make the following assumptions:

1. Countries who do not sign the treaty will not abate emissions.

2. Countries who sign the treaty do not necessarily abate emissions.

The following rules apply to the game so that we have enough information to calculate the payoffs:

1. Benefit from pollution control is global but asymmetric. Country A gains \$4 for each party who abates. Country B gains \$5 for each party who abates. Please note that only actual emissions abatement will generate benefits. Merely signing the treaty will not suffice.

2. Cost of pollution control is local and asymmetric. Country A needs to pay \$6 for emissions abatement. Country B needs to pay \$7 for emissions abatement. Please note that only actual emissions abatement will incur costs. Merely signing the treaty will not suffice.

3. When both countries sign the treaty, the treaty comes into effect, and thus there is penalty for one-sided non-compliance. More specifically, the country who fails to comply will pay the one who complies \$3.

With all the above information, answer the following questions. Explain your rationale and include necessary calculations.

1. Assuming the perspective of Country A:

a) If A does not sign the treaty, will it abate emissions? (1 point)

b) If A signs the treaty but B doesn’t, will A abate emissions? (2 points)

c) If both A and B sign the treaty, will A abate emissions? (4 points)

2. Assuming the perspective of Country B:

a) If B does not sign the treaty, will it abate emissions? (1 point)

b) If B signs the treaty but A doesn’t, will B abate emissions? (2 points)

c) If both A and B sign the treaty, will B abate emissions? (4 points)

3. Using answers from the first two questions, fill in the payoff table below. (4 points)

 Earnings from the game \$ (Country 1, Country 2) Country B Sign Not sign Country A Sign ( , ) ( , ) Not sign ( , ) ( , )

4. Given the above payoff table, what is the most likely outcome of this game? More specifically, will Country A and B sign the treaty? Will they abate emissions? (2 points)