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 abateme nt among several countries under incomplete information, i.e., local i nformation 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 ec onomic optimum. A cost sharing scheme, that results from appropriately designed international transfers, guarantees that the individual cost s of all parties are nonincreasing along the path towards the optimum. A version of Maler's (1989) ''acid rain game'' is used for a numerica l application.