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Pollution, environmental taxes and public debt: A game theory setup

Author

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  • Halkos, George E.
  • Papageorgiou, George J.
Abstract
As is well known, public debt accumulation can produce disutility and that its accumulation over time must be economically sustainable. Equally, pollutants generated during the production process also result in disutility. One of the policy weapons available to governments in regard to public debt is the generation of primary surpluses in order to sustain a capacity to repay the debt. Affecting this capacity are the cost/benefits involved in reduction of emissions through taxation. In this paper, we address the above factors in an extremely simple, dynamic game in order to find linkages between the notions of public debt, pollution, and taxation. The starting point of the model is identification of the current account as the basis of the equation of motion of the public debt which is considered as a stock. A regulator’s task is to raise the nation’s primary surplus to reduce the stock of public debt. Nash and Stackelberg differential game solutions are used to explore the strategic interactions. For the Nash equilibrium, it is found that in establishing the cyclical strategies during the game between the polluters on the one hand and the government on the other, the discount rate of the polluters is required to be greater than the government’s discount rate. That is, polluters must be more impatient than the government. In the case of the hierarchical setting, the analytical expressions of the strategic variables and the steady state value of the public debt stock are important outcomes of this study. We find the analytical expressions of the reward functions, making the implementation by policy makers an easier task. Finally, we are able to show the conditions under which conflict is more intensive in the two cases of equilibrium, according to the shadow price of the environmental damages.

Suggested Citation

  • Halkos, George E. & Papageorgiou, George J., 2018. "Pollution, environmental taxes and public debt: A game theory setup," Economic Analysis and Policy, Elsevier, vol. 58(C), pages 111-120.
    • Handle: RePEc:eee:ecanpo:v:58:y:2018:i:c:p:111-120
    DOI: 10.1016/j.eap.2018.01.004
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    References listed on IDEAS

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    Cited by:

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    4. Recep Ulucak & Danish & Yacouba Kassouri, 2020. "An assessment of the environmental sustainability corridor: Investigating the non‐linear effects of environmental taxation on CO2 emissions," Sustainable Development, John Wiley & Sons, Ltd., vol. 28(4), pages 1010-1018, July.
    5. Hai Xie & Weikun Zhang & Hanyuan Liang, 2023. "Can Local Government Debt Decrease the Pollution Emission of Enterprises?—Evidence from China’s Industrial Enterprises," Sustainability, MDPI, vol. 15(11), pages 1-20, June.
    6. Yunzhao, Lu, 2022. "Modelling the role of eco innovation, renewable energy, and environmental taxes in carbon emissions reduction in E−7 economies: Evidence from advance panel estimations," Renewable Energy, Elsevier, vol. 190(C), pages 309-318.
    7. Wang, Tianyang & Umar, Muhammad & Li, Menggang & Shan, Shan, 2023. "Green finance and clean taxes are the ways to curb carbon emissions: An OECD experience," Energy Economics, Elsevier, vol. 124(C).
    8. Li, Shoude & Zhang, Yingxuan, 2023. "Abatement technology innovation and pollution tax design: A dynamic analysis in monopoly," Energy Economics, Elsevier, vol. 119(C).
    9. George, Halkos E. & George, Papageorgiou J. & Emmanuel, Halkos G. & John, Papageorgiou G., 2019. "Environmental regulation and economic cycles," Economic Analysis and Policy, Elsevier, vol. 64(C), pages 172-177.

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    More about this item

    Keywords

    Public debt; Pollution; Taxation; Dynamic games; Nash equilibrium; Stackelberg equilibrium;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q52 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus

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