Modeling market equilibrium for transboundary environmental problem

We model the international negotiations on acid deposition reduction in Europe as a multiplayer non-cooperative normal form game. The equilibrium combining the properties of Nash equilibria and Pareto-optimal outcomes, is studied. We prove its existence and investigate a dynamic combined best reply-exchange rate adjustment algorithm to achieve it. The algorithm is interpreted as a repeated auction in an informationally-decentralized decision-making environment. The parties to the negotiation are supposed to act as price-takers and at each round maximize their net utilities subject to emission reduction feasibility and iteratively updated exchange rate constraints.