The externalities problem of transboundary and persistent pollution

This paper deals with implementing the efficient allocation of transboundary and persistent pollution. In particular, we adapt Varianʹs compensation mechanism [Varian, A solution to the problem of externalities when agents are well-informed, Amer. Econ. Rev. 85 (1994) 1278–1293] to cover situations in which pollutants extend to neighboring regions and their effects persist over time. The main contribution of this paper is the design of a mechanism that implements in subgame perfect equilibrium the efficient pollution levels in this context.