ABSTRACT
In Chapter 1, we examined the dynamics of pollution in non-strategic optimal control models. It is now time to enter the realm of differential games, in which firms endowed with some non-negligible degree of market power interact strategically over time. In so doing, they hit the environment with negative externalities accumulating instant by instant, and this calls for some form of regulation by the public authority. I will illustrate with plenty of details the continuous-time version of the fil rouge setting, in order to help those readers who are unacquainted with differential games, their applications and solution techniques, to follow the procedures step-by-step, as much as possible. The definition of solution concepts and the description of methods is relegated to the mathematical appendix, in such a way that here, as well as in the following chapter devoted to the dynamics of natural resources, I can focus on positive and normative analysis only.
