Game-theoretic modelling of transboundary pollution

Transboundary pollution is pollution which is emitted in one country, and deposited or causing harm in another country. Due to the absence of a supranational institution that could enforce international legislation, transboundary externalities cannot be approached in the same way as domestic pollution problems. In an attempt to find non-traditional solutions to such crossborder problems, recent environmental economics literature incorporates behavioural assumptions with the help of game theory. This paper discusses how different types of transboundary pollution have been approached, and which static and dynamic game theoretic solution concepts have been evaluated. While full cooperation among countries yields the economically optimal outcome it is difficult to reach, because countries are faced with an inequitable sharing of the burden of pollution abatement and with the incentive to free-ride. Side payment schemes to aid burden sharing and strategies to circumvent free riding are reviewed. Issues such as transaction costs, information and motivation are briefly discussed.