The Montreal Protocol onSubstances that Deplete the Ozone Layer (signed on September 1987) stipulates that the production and consumption of compounds that deplete ozone in the stratosphere--chlorofluorocarbons (CFCs), halons, carbon tetrachloride, and methyl chloroform--are to be phased out by 2000 (2005 for methyl chloroform). A total of 191 countries signed this agreement. The following exercise represents the bilateral negotiation process of two countries (France (F) and Germany (G)) when they decide whether or not to sign this agreement. The signature of the agreement implies the reduction of the emission levels; In contrast, the non-signature implies that the country keeps emitting pollution. Assume that the abatement costs and environmental benefits are represented by the following functions:

Abatement Cost Functions:

CF=5+ eF+ eF2

CG=2+ eG+ 0.5eG2

Environmental Benefit functions

BF=15(eF+eG)

BG=25(eF+eG)

Note that eF and eG represent the emission levels of France and Germany respectively. If countries do not sign the agreement (non-cooperative case), then France’s environmental damage is estimated to be $5 billion and Germany’s environmental damage is $2 billion.

(a) What is the set of strategies for every country?

(b) Describe France and Germany’s net benefits

(c) Construct the normal form game

(d) Obtain the cooperative equilibrium emission levels for France and Germany

Answer rating: 100% (QA)

a The set of strategies for every country is AiSign Not Sign where iFG b Frances ... View the full answer