Optimal control of acid rain in a federation with decentralized leadershipand information

We examine some aspects of the acid rain problem in the European Union. Aci d rain is a by-product of electricity production, and the EU is a federal s ystem characterized by decentralized leadership; that is, regional governme nts are leaders and the center is a common follower. Regional governments d esign environmental policies and the center designs an interregional income redistribution policy in a setting with decentralized information. Informa tion is decentralized in that an upwind regional power plant is privately i nformed about its technology. We show that the subgame perfect equilibrium of a game with decentralized leadership and information is constrained soci ally optimal. (C) 2000 Academic Press.