An optimal penalty in an environmental pollution game with the suspension of production

Issue title: Applications of intelligent & fuzzy theory in engineering technologies and applied science

Guest editors: Álvaro Rocha

Article type: Research Article

Authors: Cai, Lingru^{a; *} | Cai, Weihong^a | Zhu, Changsheng^b | Chen, Shuang^c | Mengting, Zhang^a

Affiliations: [a] Engineering College, Shantou University, Guangdong, Shantou, P.R. China | [b] Research Department, Shantou University, Guangdong, Shantou, P.R. China | [c] Economic Research Centre, Technical Economy and Consultation Department, China Energy Engineering Group Guangdong Electric Power Design Institute CO., LTD, Guangzhou, P.R. China

Correspondence: [*] Corresponding author. Lingru Cai, Engineering College, Shantou University, Guangdong, Shantou 515063, P.R. China. Tel.: +86 13531291005; E-mail: lrcai@stu.edu.cn.

Abstract: This paper investigates the enforcement of regulator using an appropriate penalty, in the framework of game theory, to force a polluting firm to act in a socially optimal way. In most related literature, the penalty is considered to be only related to the degree of pollution. In such a case, a stable equilibrium fully complying with environmental regulations is unreachable. Hence, a completely restraining penalty (CRP) is proposed in this paper to reduce the probability of the firm’s violating behaviors under the penalty mechanism with suspension of production (SOP). This statement is proved by introducing the concept of ɛ-Nash equilibrium. A set of simulation studies is conducted based on System Dynamics to verify the model. Conclusions derived from the simulation study give us further insights into the relationship between penalty and dynamic game.

Keywords: Game theory, completely restraining penalty, ɛ-Nash equilibrium, simulation, system dynamics

DOI: 10.3233/JIFS-169073

Journal: Journal of Intelligent & Fuzzy Systems, vol. 31, no. 4, pp. 2321-2333, 2016