A Game Theoretic Analysis of Tariffs, Dynamic Inconsistency, Resource Conservation, and Trade

Recently, Batabyal and Beladi (2004) have used a Stackelberg differential game model to study trade in a renewable resource between a single buyer and a single seller. The buyer uses a unit tariff to indirectly encourage conservation of the renewable resource and the entire harvest from the resource is exported to the importing nation. In this setting, it is shown that the efficacy of the unit tariff in promoting conservation depends fundamentally on whether harvesting costs are stock dependent or independent. When harvesting costs are stock independent (dependent), the optimal open loop unit tariff is dynamically consistent (inconsistent). Does this result hold when the buyer and the seller consume a portion of the harvest from this resource? We show that the Batabyal and Beladi (2004) result holds even when there is domestic consumption of a portion of the harvest in the exporting country. We conclude by discussing the implications of this finding for renewable resource conservation in general