The acid rain game as a resource allocation process with an application to the cooperation among Finland, Russia, and Estonia

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Abstract
We consider optimal cooperation in transboundary air pollution abatement among several countries under incomplete information. The countries negotiate on establishing a gradual cooperative emission reduction program to reduce the damages caused by sulphur depositions. Local information available on the marginal emission abatement costs and damage costs allows one to determine directions ofemission abatement in each country that converge to an economic optimum. A particular difficulty arising here is how the partners can guarantee that the costs and benefits from cooperation will be shared in such a way that none of them will be tempted to breach the agreement. To overcome this problem, we make use of a cost sharing scheme proposed by Chander and Thlkens (1991), that results from appropriately designed international transfers. This scheme guarantees that the individual costs of all parties are non increasing along the path towards the optimum and that no party or group of parties has an interest in proposing another abatement policy. The paper illustratess these methods by applying them to a three-country version of Maler's (1989) "acid rain game", tailored to numerically stimulate the negociations on sulphur emissions abatement between Finland, Russia, and Estonia.
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