Economy vs. Environment

Economy vs. Environment
James Melonides

The Problem

Globally, pollution is the leading cause of death and disability throughout the world, causing around 10 million deaths per year, according to a report by the Global Commission on Public Health.

President Donald Trump has taken actions to dismantle the Clean Power Plan, one of the largest steps the U.S. has taken to combat pollution and climate change. According to Environment Illinois, blocking the plan would lead to “3,600 additional premature deaths, 90,000 more asthma attacks among children and 300,000 additional missed work and schools days by 2030.”

Contrasting this with the economic benefits of the power plants and there are many payoffs to be considered. The problem obviously extends far beyond my hometown of Chicago to the entire world. Paying for environmentally friendly ways of dealing with energy production, manufacturing, etc. is expensive and no nation can deal with it alone.

Who should pay for environmental action?

The benefits of cooperation are easy to see. The difficulties arise when the costs of the various environmental management and mitigation schemes are considered.

Take pollution, for instance.

Trying to determine whose responsibility it is to pay for environmentally conscious change brings up questions about global and intergenerational justice.

How much of the cost should developing countries be expected to bear? How much of the cost can we reasonably pass on to future generations?

While every nation agrees that climate change is real and needs to be fought, there is still disagreement about how much different countries and organizations should pay to achieve the desired outcome.

There are other disagreements about the best ways to achieve the desired result, however, right now I am going to focus on the issue of who should pay.

If I put it from an American perspective, successfully signing an agreement that mitigates environmental damage with minimal financial or other inconvenience to America is better than one in which America pays dearly.

The problem is that someone must pay if the desired results are to be achieved.

One famous game theory example that illustrates one of the issues we face is the free riding problem. Here we have a bus passenger failing to buy a ticket.

The passenger reasons that the bus will be travelling its designated route in any case, and no one is harmed by a single passenger failing to pay their fare.

If this is right, every passenger should reason along similar lines.

But then the bus system would have no paying passengers and would grind to a halt. The cooperative solution whereby everyone willingly pays their fare is unstable and is open to abuse from each and every passenger.

Initial cooperation can easily degenerate into widespread defection.

Free riding in greenhouse gas reduction amounts to failing to participate in the reduction of emission targets but enjoying the benefits of the reductions in question. Free riding forces others to absorb the costs, while all parties enjoy the benefits.

As we have seen, this response encourages the deeply undesirable slide into complete non-cooperation.
No nation wants to be alone when reducing its own pollution. This means they will absorb all of the costs and none of the benefits.

Game theory brings a systematic way of structuring such cooperation problems in order to better see the actual issue.

Game Theory Model

It is easiest to model this complex scenario with only two players in the game and two options. Country A and B each have two options, Pollute and Don’t Pollute. 4 represents the biggest payoff while 1 represents the lowest payoff.

If both countries pollute, they both lose the environmental benefits of an agreement meant to reduce pollution. However they do gain some economic benefits as they can both use whatever resources they wish regardless of their care for the environment.

If one pollutes and not the other, the country that pollutes reaps the environmental benefits without sacrificing anything earning them a 4. The country that doesn’t pollute earns a 1 because they are sacrificing some economic prosperity without getting all of the benefits.

The last option is the most environmentally conscious, where both countries from each other cooperation, but still are not maximizing their economic profits due to their environmental constraints, giving both countries a 3.

The Nash Equilibrium for this matrix is (2,2) or both countries should pollute, however from this simplified model we can clearly see the best option for both parties is not polluting.

Current Situation

Agreements have been signed in the past; all aimed at reducing global pollution and greenhouse gas emissions with various degrees of success. The most famous one, the Kyoto Protocol was formed in 1990 and has been criticized for being ineffective.

There hasn’t been any significant change to CO2 emissions because of the lack of cooperation. Not all countries signed the agreement to begin with and not all that signed actually complied.

As seen in the graph above, all it takes is a few countries that do not to cooperate to outweigh all of the benefits.

Another example is the Paris Agreement. Not all countries have been taking it as seriously as other and instead prefer to take the approach we modeled in our matrix where one country receives all of the benefits and none of the costs. The U.S. is already decided to pull out of the agreement by 2020.

Agreements and protocols like the one in Kyoto are important steps forward in global diplomacy regarding pollution, however more aggressive and binding actions will be necessary in order to get all countries to curb their CO2 emissions. Everyone must participate in order to fully change the future of our planet.


It is clear that cooperation is key. However, based on the past this is much harder than it sounds. The models and data suggest that the only way to make a dent in our emissions is for everyone to contribute. People are not going to want to contribute without incentives or somebody taking initiative. When countries like the U.S. back out of agreements it sets a poor example. People need to take initiative and stick to their promises. Only then can the optimal outcome be reached.

These environmental challenges are some of the greatest problems the world has ever faced. These are not easy problems to solve. But whichever way we turn we will need to seek cooperative solutions. Game theory allows us to clearly see the benefit of working together. If we think game-theoretically, the world will be a better, cleaner place.


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  1. April 27, 2018 by vishnu.katyal

    Hey James, it was very intresting how you choose to comapre the importance of economy but also the impact it can have on the enviroemnt. Your use of game theory was a cool take on how to compare the benfits and clear view how both can work hand in hand. Recently learning about Game Theory, I was wondering if you had considered the aspect of one “firm” going against the best interest of the other. That also connects to your point of all having to cooperate, even when you mention the different protocools put into place and the flaws that lie within them. Overall a great selection of topic area and a well presented anaylasis and argument.

  2. April 30, 2018 by Eva Motolinia

    I really like the way that you applied game theory to explain the intersection of pollution between two nations. Currently, do policies that we have internationally put pressure on governments or companies? And do you think that policy pressure has worked?

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