THE ACID-RAIN GAME AS A RESOURCE-ALLOCATION PROCESS WITH AN APPLICATION TO THE INTERNATIONAL-COOPERATION AMONG FINLAND, RUSSIA AND ESTONIA

We consider optimal cooperation in transboundary air pollution abatement among several countries under incomplete information, i.e., local information only on marginal emission abatement costs and damage costs. Directions of emission abatement in each country are determined that generate a succession of emissions programs shown to converge to an economic optimum. A cost sharing scheme, that results from appropriately designed international transfers, guarantees that the individual costs of all parties are nonincreasing along the path towards the optimum. A version of Maler's (1989) ''acid rain game'' is used for a numerical application.