Effects of government regulations on Manufacturer’s behaviors under carbon emission reduction

Abstract

This paper shifts the discussion of low-carbon technology from science to the economy, especially the reactions of a manufacturer to government regulations. One major concern in this paper is uncertainty about the effects of government regulation on the manufacturing industry. On the trust side, will manufacturers trust the government's commitment to strictly supervise carbon emission reduction? Will a manufacturer that is involved in traditional industry consciously follow a low-carbon policy? On the profit side, does equilibrium between a manufacturer and a government exist on deciding which strategy to undertake to meet a profit maximization objective under carbon emission reduction? To identify the best solutions to these problems, this paper estimates the economic benefits of manufacturers associated with policy regulations in a low-carbon technology market. The problem of an interest conflict between the government and the manufacturer is formalized as a game theoretic model, and a mixed strategy Nash equilibrium is derived and analyzed. The experiment results indicate that when the punishment levied on the manufacturer or the loss to the government is sizable, the manufacturer will be prone to developing innovative technology and the government will be unlikely to supervise the manufacturer.