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Contents Introduction

Chinese sulfur dioxide emissions cause acid rain in China and in Japan. The China-Japan acid rain problem is an interesting case of unidirectional transboundary pollution which has received little attention in the economics literature. We construct a simple model to highlight the key incentives underlying environmental policy making in each country. We examine simultaneous and sequential noncooperative games to illustrate the shortcomings of decentralized policy making. Sequentiality seems to be important, since one may interpret China’s disposition against limiting its sulfur dioxide emissions as a sign of policy leadership vis-à-vis Japan. Motivated by the inefficiency of decentralized behavior, we design international schemes under which an international agency (IA) is in charge of implementing income transfers from Japan to China. Participation in each scheme is voluntary. We show that the proposed international schemes are Pareto efficient and implementable. We also show that policy leadership play no role in the allocation of resources when the IA is a common follower.