Vietnam's Role in International Environmental Agreements

VIETNAM NATIONAL UNIVERSITY
FACULITY OF ECONOMIC
---------------------------------------------------------
YASUKATA FUKAHORI
THE ROLE OF INTERNATIONAL AGREEMENTS IN
ENVIRONMENTAL CONSERVATION AND ITS IMPLICATION TO
VIETNAM
Major: Political Economy
Code: 62.31.01.01
DOCTORAL PHILOSOPHY OF ECONOMICS
Advisor: 1. Associated Professor, Doctor Phi Manh Hong
2. Doctor Phung Xuan Nha
HaNoi, 2008

VIETNAM NATIONAL UNIVERSITY, HANOI
COLLEGE OF ECONOMIC
---------------------------------------------------------
YASUKATA FUKAHORI
THE ROLE OF INTERNATIONAL AGREEMENTS IN
ENVIRONMENTAL CONSERVATION AND ITS IMPLICATION TO
VIETNAM
Major: Political Economy
Code: 62.31.01.01
DOCTORAL PHILOSOPHY OF ECONOMICS
Advisor: 1. Associated Professor, Doctor Phi Manh Hong
2. Doctor Phung Xuan Nha
HaNoi, 2008

CONTENTS
Page
Introduction ……………………………………………………………………… 1
Chapter I: Economic Theories Related to Environmental Conservation………. 14
1.1. Theories of Common Pool Resources …………………………………….. 14
1.2. Theories of Collective Actions and International Agreements ……………. 23
1.3. Coase Theorem ………………………………………………………….... 25
1.4. Game Theory ……………………………………………………….…….. 26
1.5. Other Economic Theories …………………………………………….…... 31
1.6. Application of Economic Theories to Environmental Conservation………. 36
1.6.1. Sustainability and Budget Line – Case Study for Forest Conservation……. 36
1.6.2. Game theory scenarios and possible contribution arrangements of
international agreements ………………………………………….……….
46
1.7. Summary of Results ………………………………………………….…… 88
1.8. Recommendations …………………………………………………….…... 90
Chapter II: Environmental Conservation in Relation with Trade, ODA and
Sustainable Development …………………………………………..…………….
92
2.1 Trade Agreements and Environmental Issues …………………………..…. 92
2.1.1. The New Politics of Trade ………………………………………...……… 92
2.1.2. Trade under Commodity Agreements and Environmental Conservation….. 96
2.1.3. WTO Dispute Settlement Mechanism and Environmental Conservation ..... 100
2.2. Global Environmental Issues ……….…………………………………….. 101
2.2.1. Issues and Problems related to Global Environmental Conservation………. 102
2.2.2. World Summit for Environment ……………….…………………………. 103
2.3 ODA and Environmental Issues ………………………………………….. 106
2.3.1. Trade and ODA …………………………………….…………………….. 106
2.3.2. ODA and Environmental Issues …………………….……………………. 107
2.3.3. Problem of International Aid …………………………….……………….. 107

2.3.4. Private Sector …………………………………………………………….. 109
2.3.5. Transparency …………………………………………………….………. 109
2.3.6. The Problem of Sovereignty and Economic Forces ……………………… 110
2.3.7. Capacity Building, Education, and International Treaties ………….…….. 110
2.4. Sustainable Management of Environmental Natural Resources ……….…. 111
2.4.1. Definitions of Sustainable Development …………………………………. 111
2.4.2. Economic growth for local welfare and conservation - Sustainable
Development.......................................................................................................
112
2.4.3. Problems Causing Sustainable Management ……………………..……….. 114
2.5. Environmental Conservation and International Agreement ………………. 116
2.5.1. International Negotiation on Environmental Conservation ……………….. 116
2.5.2. Fund Raising under the Existing International Agreements ………………. 117
2.5.3. ITTO and Forest Conservation ……………………………………………. 118
2.5.4. Limit in conservation by an international agreement organization ………… 130
2.6 Experiences in Other Countries……………………………………………. 132
2.6.1 Japan ……………………………………………………………………… 132
2.6.2 South Korea ………………………………………………………………. 133
2.6.3 China ……………………………………………………………………… 133
Chapter III: Issues Related to Vietnam …………………………………………. 137
3.1. The New Trade Debate and Its Implication to Vietnam …………………... 137
3.1.1. Vietnam’s New Membership of WTO …………………………………… 137
3.1.2. New Politics of Trade and Vietnam ……………………………………… 138
3.1.3. CDM and Vietnam ……………………………………………………….. 139
3.1.4 ODA and Environment/Trade Issues for Vietnam………………………… 141
3.2. Application of Economic Theory - Implication of ITTO Mechanisms to
Vietnam - ………………………………………………………………….
142
3.2.1. Scenario 1 ………………………………………………………………… 144
3.2.2. Scenario 2…………………………………………………………………. 151
3.2.3. Analysis of results ………………………………………………………… 156
3.2.4. Summary of Games ………………………………………………………. 157
3.3. Experiences in Other Countries for the comparison with Vietnam………… 160
3.2.1. Japan ……………………………………………………………………… 160
3.2.2. South Korea ………………………………………………………….…… 160
3.2.3. China ……………………………………………………………………... 160

3.2.4. Lessons from other countries …………………………………………… 161
Conclusion ………………………………………………………………………. 162
List of reference materials ……………………………………………………… 168

LIST OF FIGURES, BOXES AND TABLES
Page
Chapter I: Economic Theories Related to Environmental Conservation 15
Figure 1.1. Supply=Demand Relation for Normal Private Goods 18
Figure 1.2. Supply=Demand Relation for Public Goods 18
Figure 1.3. Total Cost and Total Revenue Relation (Private goods) 20
Figure 1.4. Marginal Cost and Average Revenue Relation (Private Goods)
20
Figure 1.5. Total Cost and Total Revenue Relation (Public Goods) 21
Figure 1.6. Marginal Cost and Average Revenue Relation (Public Goods) 21
Figure 1.7. Natural Resource Budget Line and Sustainable Level 23
Box 1.1. International Agreement and Game Theory 29
Figure 1.8. Contribution and Depletion Relation 30
Figure 1.9. Export Quota Allocation and Market 34
Figure 1.10. Elasticity of Substitution (High Elasticity) 35
Figure 1.11. Elasticity of Substitution (Low Elasticity) 35
Figure 1.12. Current and Possible Future Budget Lines 37
Figure 1.13. Long-term Tropical Forests Depletion Perspectives 38
Figure 1.14. The case sustainable level is set at 2000 41
Figure 1.15. The case sustainable level is much higher than present level 41
Figure 1.16. Contribution and Sustainable Level of Resource Depletion
(Case 1)
44
(Case 2)
44
(Case 3)
45
Figure 1.19. Relation between Fund and Global Environmental Value
/ Scenario 1 (Gv = 2*(Cp + Pp) - 1500)
48
Box 1.2. Contribution to the Fund and Game Theory /Scenario 1 (Gv =
2(Cp + Pp) - 1500)
49

Box 1.3. Same environmental value for both consumers and producers 53
Box 1.4. No environmental value for producers 54
Box 1.5. Half environmental value for producers 55
Box 1.6. Contribution to the fund and Game Theory /Scenario 1b (Gv =
2(Cp + Pp) - 1500)&(Pv = Gv - Pp + Cp)
57
Figure 1.20. Contribution and Sustainable Level of Depletion (Case 4: Both
consumers and producers share responsibility)
63
Figure 1.21. Budget Line of the Fund 66
Figure 1.22. Budget Line Shift by Producers' Efforts 66
Figure 1.23. Relation between contribution and Global Environmental
Value /Scenario 2 (Gv = Cp + Pp)
68
Figure 1.24. Relation between contribution and Global Environmental
Value /Scenario 3 (Gv = Cp + Pp -1500)
69
Box 1.10. Contribution to the fund and Game Theory /Scenario 2 (Gv =
Cp + Pp)
71
Box 1.14. Contribution to the fund and Game Theory /Scenario 3 (Gv =
Cp + Pp -1500)
75
Cp + Pp)&(Pv = Gv -Pp + Cp)
80

Cp + Pp -1500)&(Pv = Gv - Pp + Cp)
84
Chapter II: Environmental Conservation and Trade ………………. 92
Table 2.1. Developing Countries' Share in Total Exports of Selected 99
Table 2.2. Totalforestarea,relatedlandareaandpopulationin1995 120
Table 2.3. Forest cover change for developing countries 123
Table 2.4. Current and projected consumption of forest products
(1990-2010)
124
Table 2.5. Natural forest and Net Plantations in developing countries 125
Table 2.6 Forest cover state and change by ecological zone for tropical
countries
126
Chapter III: Issues Related to Vietnam ………………………………. 132
Figure 3.1. Relation between the Bali Partnership Fund and Vietnam
Scenario 1 (GVv = Cp + Vp)
146
Box 3.1. Contribution to the Bali Partnership Fund and Game Theory /
Scenario 1: Vietam (GVv = Cp + Vp)
147
Box 3.2. Same environmental value for both Vietnam and consumers 148
Box 3.3. No environmental value for Vietnam 149
Box 3.4. Half environmental value for Vietnam 150
Box 3.5. Contribution to the Bali Partnership Fund and Game Theory
/Scenario 2: Vietnam (GVv = Cp + Vp)&(Vv = GVv -Vp +
Cp)
152
Box 3.6. Same environmental value for both Vietnam and consumers 153

Abbreviations
AFTA ASEAN Free Trade Area
APEC Asia Pacific Economic Cooperation
ARF ASEAN Regional Forum
ASEAN Association of East Asian Nations
ASEM Asia Europe Meeting
BTA Bilateral Trade Agreement
CDM Clean Development Mechanism
CEPT Common Effective Preferential Tariff
COP Conference of the Parties
CPR Common Pool Resource
CPRGS Comprehensive Poverty Reduction and Growth Strategy
DDA Doha Development Agenda
DSB Dispute Settlement Board
FAO Food and Agriculture Organization
FCCC Framework Convention on the Climate Change
FTA Free Trade Agreement
FTAA Free Trade Area of the Americas
GATS General Agreement on Trade in Services
GATT General Agreement on Tariffs and Trade
GEF General Environmental Facilities
GHG Green House Gas
ICO International Coffee Organization
IMF International Monetary Fund
IPCC Inter-Governmental Panel on Climate Change
ITTA International Tropical Timber Agreement
ITTO International Tropical Timber Organization
MAI. Multilateral Agreement on Investment
MDG Millennium Development Goals
MEA Multilateral Environment Agreement

MMT Methylcyclopentadienyl Manganese Tricarbonyl
NAFTA North American Free Trade Agreement
NGO Non-Governmental Organization
ODA Official Development Aid
OECD Organization for Economic Cooperation and Development
PRSP Poverty Reduction Strategy Paper
SOE State Owned Enterprise
TED Turtle Excluder Device
TPA Trade Promotion Authority
UN United Nations
UNCED United Nations Conference on Environment and Development
UNDP United Nations Development Programme
UNEP United Nations Environmental Programme
USITC United States International Trade Commission
WB World Bank
WCED World Commission on Environment and Development
WSSD World Summit on Sustainable Development
WTO Trade Organization
WWF World Wildlife Fund

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December 2007
INTRODUCTION
1. Necessity of the thesis topic
Reflecting the growing concerns of global community on rapid depletion of
tropical forests, and responding to their determinations stated in Rio Declaration of
1992, governments and people of the global community reinforced their commitments
to environmental sustainable society for the offspring of all human beings. Especially,
a number of new international agreements are created or renewed to include more
environmental conservation oriented clauses. Efforts being made under FCCC
(Framework Convention on the Climate Change) and ITTA (International Tropical
Timber Agreement) of 1994 are two of the examples. Organizations such as APEC
(Asia Pacific Economic Cooperation) or WTO (World Trade Organization) also
increased concerns on environmental conservation by way of reorganizing trade related
measures. It is therefore imperative to study how these international organizations
should achieve the sustainable development. Particularly, it is important to study the
relations between sustainable development and trade liberalization which these
organizations promote in order to increase the economic benefits of global community
including developing countries such as Vietnam.
2. General Information on Thesis Study
(1) Previous Studies
The mechanisms or arrangements adopted by member countries of
international agreements can be examined theoretically and scientifically by comparing
them with previous economic theories such as those stated below. In order to examine
these theories, mathematical analysis will be employed as a core tool of methodology.
Particularly, the paper will try to come up with possible mathematical solutions that are

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workable even under so-called “prisoners dilemma” under game theories.
(a) Theories of Common Pool Resources
Since most of the environmental assets are common pool resources, the plight
of current tropical forests and each member country's decision making process may be
examined in accordance with theories of common pool resources or public goods.
(b) Theories of Collective Actions
Each member country's contribution to international organizations can be
affected by the amount to be contributed from other member countries. Hence, the
mechanisms adopted by international agreements can be examined by the theories of
collective actions.
(c) Other economic theories
Other economic theories relevant to environmental assets, such as theory of
monopolistic market, will also be introduced where necessary.
In order to verify the adaptability of these theories, an international issue and a
local issue will be examined. First, WTO agreements and the Doha Development
Agenda will be examined particularly in its relation with global environmental
movements. Secondly, the situation in Vietnam will be examined particularly in
relation with environmental conservation efforts in Vietnam in a global context.
There have been a number of studies which have led to the theories stated
above, thereby making this thesis possible. The following studies are just some of
such examples. „Governing the Commons‟ (Elinor Ostrom, 1990) and „Logic of
Collective Action‟ (Olson, 1965) are the two most important studies which provides
important theoretical basis of this thesis.
(a) Environment White Paper of Japan (Ministry of Environment, 2002)
There are a number of documents that raise the concern on the global
environmental crisis. This Environmental White Paper of Japan presents the facts
about the state of the global environmental assets and the global efforts being taken to

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address these problems. This document, among many others, can be used as a
reference for us to know how the global community generally views the environmental
degradation as a significant threat to the global community. As a government
document, this book provides brief but very clear views on this point. In addition to
this Japanese official report, other official documents such as FAO Year Books, UNEP
Annual Reports or ITTO Official Reports also provide the general views on the plight
of the global environmental assets.
(b) Environmental Economics (B.C. Field, 1993)
This is a textbook widely used for the study of environmental economics. This
book provides basic environmental economic theories and covers every aspect of
environmental economic issues. This textbook is useful in exploring proper ways of
application of economic theories onto mechanisms adopted by international
agreements.
(c) Environmental Economics and Policy (Tietenberg, 1994)
This is another book on environmental economics. Although the contents and
structure of this book is more or less similar to the book by B.C. Field, this book helps
deepen and broaden the understanding on environmental economics. This textbook
presents important analysis on international environmental economic problems,
especially the sustainable development issues, which are used as the theoretical basis in
constructing theoretical approach in the proposed thesis.
(d) Governing the Commons (Elinor Ostrom, 1990)
This article by Ostrom provides an important key to a break-through in the
collective action problems. Traditional game theories indicate that the rational
behavior by individuals tend to result in the most undesirable outcome. This is
considered also true in international relations, especially when it comes to the allocation
of contribution. Ostrom suggested in this Article that the desirable result can be
achieved if proper communication is established prior to the games. This suggestion
would be explored in verifying that the proper discussion and negotiation under
international organizations can lead to a most desirable outcome for all or the majority

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of their member countries.
(e) The Logic of Collective Action (Olson, 1965)
Olson first introduced the concept of "collective action problem" in this 1965
article. The inconsistency between individual and collective interests is explored in
detail in this article. Since the tropical timbers are considered as "global commons,"
this article provides theoretical background why the tropical forests face collective
action problem and are doomed to be over-exploited. Combined with other economic
theories of public good and common pool resources (CPRs), this article by Olson
constitutes one of the backbones of the theoretical approach in environmental
economics.
(f) Price Theory and Applications (Hirshleifer, 1992)
This is another textbook widely used for micro-economics. This basic
textbook on basic economic theories presents very detailed explanation about market
principles. This book supports theoretical approaches employed in this article by way
of supplementing the environmental economic theories contained in the book by B.C.
Field and others. Especially, this textbook provides useful theoretical analysis on
characteristics of public goods.
(g) Ecology (P. Stiling, 1996)
This book introduces and explains the basic ecological functions. Although
ecological issues are not directly related to this article because it is basically focusing on
the international economic issues, basic understanding on ecology is needed to realize
the issues related to the global environmental assets.
(h) WTO, after Seattle (Jefferey Schott, 2001)
WTO negotiations became paralyzed at its 3rd Ministerial Meeting held in
Seattle in 1999. The negotiation to launch a new round was thwarted mainly because
NGOs around the world objected the globalization of trade. These NGOs are mostly
environmental groups such as Green Peace and WWF which believe that trade
integration harm the global environment. This book by a well-know scholar from

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Institute of International Economics of the United States illustrates how the WTO
negotiations are affected by environmental conservation movements.
(2) International Relations Related to Environmental Economic Issues
As stated above, there is a growing global concern on the issue of the
environmental conservation. There are many reasons for the concern. First of all,
there is a fear that some of the precious environmental assets such as tropical forests
may disappear totally in the future not very far from now if the depletion at the current
very rapid rate continues. Second, people on the earth are experiencing irregularity of
the world climate and its catastrophic effects on the earth, i.e., floods, droughts, loss of
low land areas, etc. These natural disasters are being caused by the global warming
and other serious degradation of global assets. In Vietnam, there has been an initial
notion of environmental hazard caused by industrialization. Deforestation is one of
the serious problems Vietnam is faced with.
Clearly, the global environmental conservation has become an urgent task that
the global community should address jointly. Particularly, the relation between trade
and environment has become a center of discussion for trade liberalization negotiations
during the past few years. Hence, it is felt urgent by the world community to
reduce or stop depletion and degradation of the global environmental assets. Many
efforts are being made by individuals, governments, NGOs and international
organizations including Green Peace and WWF. International organizations and
agreements are increasingly being designated to address this serious issue and can be
considered as the most effective mechanisms to handle issues related to the
conservation of environmental assets.
The main question here is how effectively international agreements can handle
this issue. Particularly, efforts being made under WTO framework are of significant
importance because the relations between trade and environment have become
inseparable. Vietnam is trying to be a member of WTO by the end of 2005 and the

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implication of WTO agreements and the ongoing Doha Development Agenda
negotiations needs to be examined.
A detailed study on objectives of international agreements and their action
plans may reveal how they are designed to protect the global environment and local
environment in Vietnam.
Under DDA, 142 member countries decided to include “environment” as one
of the negotiation agenda to be concluded. EU and its member countries, particularly
France, very strongly requested that the environmental protections must clearly be
linked to the trade liberalization mechanism. On the other hand, most developing
countries opposed to even include it as a part of agenda at all. As a result,
environmental issues were agreed to be integrated under the new round negation of
WTO but only partially. DDA is only mandated to discuss the implication of current
international environmental agreements to trade. However, the future development of
environmental negotiations still remains to be seen.
Further, it would be very useful to introduce some leading present economic
theories and analyze the international agreements in accordance with these theories.
By adopting theoretical approaches, the role and limits of international agreements in
the environmental conservation could become clear.
There is no doubt that the global environmental conservation is an urgent and
very important global issue today. A lot of efforts are being made by the United
Nations. For example, UNCED of 1992 and its agenda 21 may be the most
well-known achievement made by the UN. Serious efforts are also being made by a
number of other international organizations, governments, NGOs, and individuals.
However, international agreements are in many cases established to serve this
purpose intentionally by member governments. Therefore, to conduct a research on
international organizations and their roles in global environmental conservation would
be a important task. The knowledge about the roles of international organization would
be a very important asset for those who are concerned about the global environmental

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conservation.
Moreover, it is of significance to study the implication of international
agreements onto the environmental conservation in Vietnam, since Vietnam is rapidly
integrated into the global community as a new member of WTO.
There have been a number of studies related to the relations between trade and
environment especially in the context of WTO Doha Round Negotiations. There are
also a number of studies related to other international agreements such as FTAA and
US-Jordan FTA. One of the best studies probably the “WTO after Seattle” by Jeffery
Schott of which the review is stated below.
However, there has been no publication analyzing the impact of trade
agreements mathematically in terms of environmental conservation. This thesis is,
therefore, unique, original and very challenging in this aspect.
3 Objectives of the Study
Thus, the purpose of this thesis is to examine how International Agreements
envisage to contributing to conservation of the global environmental assets that are
diminishing rapidly at an increasing rate. In order to discuss this, first the general
objectives and mechanisms of international agreements need to be introduced. Then,
currently available economic theories need to be applied with the purpose to verify the
effective functions of international agreements in general in environmental conservation.
Such an examination would contribute to seeking the best policy alternatives to achieve
sustainable global development and local development in a country such as Vietnam.
It is of absolute importance that Vietnam is prepared for the possible
consequences of environmental degradation and responsibilities under international
agreements. This thesis will introduce some of the possible alternative paths that
Vietnam will need to take during its economic development process.

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4. Scope of the Study
(1) Scope of the Study
As for the scope of the study, it is necessary to study the relation between WTO
and environmental issues. Environmental negotiation is included in the current Doha
Development Agenda (DDA) negotiations but to the minimum extent. The proposed
thesis will discuss how the environmental negotiations under DDA will affect the future
global trade. Secondly, as a supporting factual background to the DDA negotiations,
the efforts that have been made by the international community to conserve global
environmental assets need to be examined.
The most important element in the Vietnamese context in the proposed thesis
will be the Vietnam‟s accession to WTO which has taken effect as of January 11, 2007.
First, the thesis will discuss the current situation of the multilateral and bilateral
negotiations on Vietnam‟s possible accession to WTO. Secondly, the implication of
Vietnamese accession to WTO and its obligations related to environmental
conservation will be examined.
The detailed analysis of issues Vietnam is being faced with WTO accession,
such as SEO reform and intellectual property rights, are also discussed in the Chapter 3
of the Thesis.
(2) Limitation of the Study
However, there are a few limitations in writing the proposed thesis.
Functions of international agreements can be analyzed separately by different
economic theories. However, it will be impossible to verify the whole functions of the
agreements from pure economic theories. International organizations are in many
cases experimental and actual operating organizations. Just as the real economy can
not be fully explained by economic theories, economic theories will not be able to
explain the overall roles of international agreements completely.

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Second, it will be very difficult to obtain all data and information which will be
useful for writing the proposed thesis. Especially, statistical data on the volume of
production, export, import, consumption, depletion and plantation, etc., may not be
accurate nor updated to be used as the basis of analysis. Further, evaluation or
judgment about the plight of environmental damages on the global environmental assets
should always be subject to bias in selecting such data. Needless to say, replies
obtained from interviews will also be subject to bias.
The relation between trade and environment is a new international issue.
Although significant amount of researches have been made during the past few years,
there seems to have been no researches on the impact of environmental negotiations of
WTO onto Vietnam. This is understandable since Vietnam is not a member of WTO
and Vietnam does not have serious environmental problems at this moment.
However, it is said to be almost certain that Vietnam will go through the
process of environmental degradation and the consideration and introduction of new
measures to address such domestic environmental issues. Vietnam has now become a
member of WTO. Vietnam now has to abide by all of the WTO agreements. The
future trade of Vietnam will have to take into consideration the environmental aspects
under WTO agreement.
This thesis, therefore, provides new elements for Vietnam with regard to its
implication of trade under WTO obligations. This may be the first attempt to analyze
the impact of Vietnam‟s WTO membership in terms of the relations between trade and
environment. It is hoped, therefore, that this thesis becomes a part of guidance for
Vietnam in adjusting its trade policies under WTO agreements.
5. Method of Study
The final conclusion of the proposed thesis will be whether the mechanisms of
international agreements are proved to be in line with economic theories. Further,
effectiveness of such mechanisms in environmental conservation will be examined by

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applying Coase Theorem. In the absence of an absolute authority in the international
society that shall force the level of consumption of environmental resources, it should
be necessary to study if international organizations can regulate the policies of their
member countries.
In this thesis, the focus is set on the general mechanisms of international
agreements. This approach would make it clear how international agreements try to
achieve sustainable management of the global environmental assets. The mechanisms
and arrangements adopted by a number of international agreements must be studied
carefully in order to understand the effectiveness and impact of their projects in relation
with the global environmental conservation.
Second, the results obtained by the above studies are further examined with the
relevant economic theories which are introduced in the Chapter 1 of the thesis. By
applying economic theories, the roles and mechanisms of international agreements in
conservation of global environmental assets will become clearer.
Third, the Vietnamese context is examined. Vietnam has become a member
of WTO in January 2007 and its implication to environment needs to be assessed
properly. Apart from trade implications, Vietnam will have to take the path of
balancing between industrialization and environmental degradation. Japan suffered
quite heavily from pollutions during the fast industrialization process during 60‟s and
70‟s. Such experience of Japan needs to be properly introduced to Vietnam whose
economy is experiencing a very fast economic growth.
The methodology of the study will mainly be the researches based on the
statistics and other public documents related the relation between environmental issues
and international agreements, especially on trade. Some of the evidences will be
derived from interviews and the diplomatic experiences of the author of the thesis.
6. New Contributions of the Study

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(1) New findings related to theory
(a) A new economic equation to relate two levels of sustainable management of
economic resource
This thesis introduces a new concept of combining two types of sustainable
management of natural resources in a single economic equation and also under a single
diagram. It has been known already that there are a number of definitions on
sustainable development, and particularly, the following two types are often used as the
basic level of sustainable management. In this thesis, one is represented as S which
means the resource level where human beings and their economic activities are
sustained permanently by the consumption of resources. The other one is represented
as OS which means that, regardless the human sustainability, the resource itself is
completely renewable if consumption is under this original level of environmental
amenity.
The relation is established as:
C ≦ ΔOS*E + S therefore, E ≧ (C – S)/ΔOS1
This equation is innovative because it shows us the relation between S and OS in a
single diagram which would help us to identify the point of two possible sustainable
levels at the same time in a figure. Particularly, it is innovative that the renewal rate of
resource, i.e., ΔOS which represents the coefficient of the OS curve, is found to be a
significant factor to see the degree of divergence between the two levels of
sustainability. The Chapter 1.1 introduces a detailed analysis of this equation.
(b) Introduction of two enforcement factors as the background of games to see the
impact on the contribution trade-offs
The games under game theory normally end up with catastrophe because of
1
E stands for Environmental Amenity. Likewise, C for Consumption, OS for Original Sustainability, S for
Sustainable Level for human activities. ΔOS stands for marginal net consumption.

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„prisoners‟ dilemma.‟ Ostrom introduced a new concept to the game theory that the
introduction of a new factor represented as „e‟ for the enforcement of cooperation will
lead the game to a success. This thesis adopted the „e‟ as a governing condition for all
games to see the effect. This thesis also introduces a new factor represented as „a‟ for
the arbitration system. The games that are assumed to be supported by this factor in
the thesis are found to be more successful than normal cases.
It is truly innovative to introduce these two factors together in games, because
these two factors, i.e., „e‟ and „a,‟ respectively imply enforcement of penalties and the
enforcement of self-arranged arbitration system or dispute settlement mechanisms,
which should also guarantee the proper negotiation or consultation process and
maximum transparency of information.
(2) New findings related to the application of theory
The games played with the above mentioned two factors under the principles of
game theory turned out to be more successful than the cases without them. This
outcome rightly confirms that the policy dialogue with information transparency and
the proper system of arbitration or dispute settlement are crucially important for the
negotiation under international organizations. It is particularly innovative to note that
these two factors should be introduced together to make negotiations even more
successful.
(3) New findings as implication to Vietnam
As already stated above, Vietnam will face certain amount of pressure from
members of WTO to Vietnam‟s domestic environmental policy through trade measures.
It would be possible that Vietnam will be sanctioned by WTO if Vietnam does not
abide by the requests from other international environmental organizations such as
ITTO, because the relation between WTO and other environmental organizations are
now being negotiated under Doha Development Agenda
A number of games played in the thesis turned out to be failure for which
sanctions may be applied by the organization. This implies that Vietnam may also be

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sanctioned if the negotiation under international organizations fails.
Then what Vietnam should do? This thesis tries to provide an answer to this
question. As general game theory tells us, it is not realistic to think that there would
be a system for any games to become successful. Therefore, in some difficult cases,
sanctions may of course be unavoidable. This thesis, however, proves that the games
become more likely to succeed when the fund or contribution is directly transferred
from consuming member countries to Vietnam. Coase theorem holds a crucial key for
this to happen. In other words, for certain environmental natural resources which
Vietnam holds the complete property rights over the environmental quality of the
resources, such as tropical timbers, Vietnam would possibly request cash support from
international organizations even without paying any contribution to the fund. In order
for this path to be taken by Vietnam, Vietnam needs to identify how much other
countries see the value of the environmental amenity would be. If other countries or
the global community in general see it large enough, the game may become successful
and Vietnam would not be sanctioned even though Vietnam does not contribute to the
fund. The point is that Vietnam should obtain sufficient information about the
position of other counties and then negotiate for the possible fund transfer as a
compensation for not consuming or depleting certain resources which Vietnam holds
property rights.

- 14 -
Chapter I
ECONOMIC THEORIES RELATED TO ENVIRONMENTAL
CONSERVATION
The environmental natural resources are not governed by the market principles.
Therefore, they are being depleted along with the development of global economy.
This thesis examines the economic mechanisms surrounding the environmental natural
resources and economic theories that are generally acknowledged as the basic tools for
the economic analysis of environmental conservation.
1.1. Theories of common pool resources
Environmental quality is essentially a public good. It is therefore imperative
to know the characteristics of public goods in order to understand environmental issues.
Public goods can be classified into a few more specific categories such as pure public
goods, congestive goods and common pool resources (CPRs). CPRs are also
sometimes called open access goods or common property resources. General
definition of public goods is that they are the goods that can be consumed by other
people even if they are already consumed by one person. This is distinctively different
from private goods that can not be consumed by another person if once consumed by
one person. Examples of pure public goods are defense and radio broadcasting
services. If these services are once provided, everyone can enjoy the benefit. For
these services, quality of the services is not affected by the number of people who
receive the services. Examples of congestive goods are public roads and bridges.
These public goods are open to everyone but the number of people who can use the
goods is not infinite. The more people use the facilities, the more they become
congested. Efficiency of the services will decrease as they become congested;
however, the amount of the goods is not affected. Examples of CPRs are clean air,

- 15 -
water, ocean fisheries, forests, to mane only a few. Under the present legal system,
they are not generally considered as private goods. Therefore, access and exploitation
of these goods are free to everyone. They can be consumed as first comes first serves
basis. For these goods, as the number of people who consume these goods increase,
the amount of the goods themselves decrease and the service quality may deteriorate.
CPRs can be further classified into renewable and non-renewable resources. If the
rate of consumption is faster than the rate of renewal, the goods will be all consumed up
in the end.
Although CPRs can to some extent behave like private goods in accordance
with economic theories, theory analysis of public goods fits more in understanding the
characteristics of CPRs. Therefore, it is required to introduce hereby the theory of
public goods.
Common Pool Resources (CPRs) are those that are not exclusively controlled
by a single agent [Tietenberg, p.38]. The term "common-pool resource" also refers to
a natural or man-made resource system that is sufficiently large as to make it costly to
exclude potential beneficiaries from obtaining benefits form its use [Ostrom, p.30].
Access to a CPR can be limited to a single individual or firm or to multiple individuals
or teams of individuals who use the resource system at the same time.
It is necessary to understand how CPRs are treated in the market because this is
the starting point why environmental resources can not be left to the market forces for
their own conservation. Otherwise, no efforts would be needed by any international
organizations.
For normal private goods, the demand and supply function can be illustrated as shown
in the Figure 1.1. Here, the amount of supply is expected to grow as price of goods
increases. This is considered as a common characteristic of normal private goods.
However, for public goods, especially for CPRs, the amount of supply, accordingly the
price as well, is not affected by demand changes. As illustrated in the Figure 1.2, the
amount of increase in the case of public goods tends to be greater than normal private
goods as described in the Figure 1.1. Public goods are thus by definition free to be

- 17 -
P D２ S1
D1
P2
P 1
S1 D２
Q‟ D1
0 Q1 Q2 Q
S1 is the supply curve for a normal private good.
Figure 1.1: Supply-Demand Relation for Normal Private Goods
P
D2
D1
P1 S2 S2
D1 D2
Q‟‟
0 Q1 Q3 Q
S2 is the supply curve for common pool resources
Figure 1.1. and 1.2. show that Q‟‟>Q‟; therefore, CPRs are likely to be priced lower and
exploited more than private goods
Figure 1.2: Supply-Demand Relation for CPRs

- 18 -
These supply and demand relations can also be illustrated as shown in Figure 1.3,
1.4, 1.5 and 1.6, using Total and Marginal Cost functions. A total cost curve is
normally considered to rise steeply first, then increase slowly and then again rise
steeply. The maximum profit is achieved where AR=MC; therefore, the quantity
supplied to the market would be Q1 in the case of normal private goods as shown in the
Figure 1.3. In the case of public goods, the amount supplied into the market is larger
than that of private goods. In the Figure 1.5, Q2 is the amount of supply. The cost of
purchasing environmental goods is small or almost nothing as they are CPRs; therefore,
the total cost curve reflects only the cost of harvesting operation. Thus, the public
goods or CPRs are proved to be over-exploited than private goods, by MC and MR
approach as well2
.
2
The relation Q2 > Q1 is clearly found by Figures 3-6. Also note that the relation P1 > P2 is
established.

- 19 -
TR&TC
TC
TR
0 Q1 Q
Figure 1.3: Total Cost and Total Revenue Relation (Private goods)3
P
MC
P1 AC AC
AR
0 Q1 Q
Figure 1.4: Marginal Cost and Average Revenue Relation (Private Goods)
3
TR=Total Revenue, P=Price, TC=Total Cost, AC=Average Cost, AR=Average Revenue,
MC=Marginal Cost

- 20 -
TR&TC
TC
TR
0 Q2 Q
Figure 1.5: Total Cost and Total Revenue Relation (Public Goods)4
P
MC
P2 AC
AR
MC
0 Q2 Q
Figure 1.6: Marginal Cost and Average Revenue Relation (Public Goods)
4
TR=aQ The coefficient a is smaller in Figure 1.5 than Figure 1.3 because of the
characteristics of economic externality of CPRs.

- 21 -
The implication of above tendencies of over-exploitation of public goods
(CPRs) for the sustainable management of the resources can be illustrated as shown in
the Figure 1.7. In this Figure 1.7, the vertical line S represents where the resource can
be managed to maintain the sustainable growth level. If consumption level leaves the
environmental amenity level to the right of S, the resource can be sustainably managed,
and if consumption brings the amenity level down to the left of S, the resource size is
not capable to support sustainable management the resources. It should be noted that
the word "sustainable" has not been clearly defined in the cases some of the CPRs such
as clean air. Here, in order to understand easier the environmental concerns relating to
such CPRs, S is considered to be the level where the resources can satisfy all
environmental economic values. Therefore, below this point the CPRs capacity to
maintain global environmental values is not sufficient.
Now, let us introduce a new line in the Figure 1.7. to identify the desired level
of consumption at which natural resources are completely and self-sufficiently
sustainable in their original net amount on an annual basis. Here, it is named as the
Original Sustainability Consumption (OS) line. OS=0 line is the boundary within
which the net consumption of CPRs is always zero or negative at the end of each year.
In other words, the consumption is being offset annually by its natural reproduction
below this line. The resources will keep decreasing in amount above this level,
leading to the continuous shrink of the Production Possibility Curve (PPC). Thus,
OS=0 line is a useful new tool to illustrate the level of „desirable consumption point.‟
This curve provides new concept with regard to the sustainable management. In an
absolute sense, the OS=0 is the true sustainable curve but that is not necessarily the case
under consensus. Sustainability is often set at the point where human being can
survive sustainably, which allows certain abundant natural resources to reduce its total
amount. Therefore, the introduction of the concept of OS=0 is truly innovative
because it illustrates the point of environmental sustainability and resource
sustainability at the same time in a figure.

- 22 -
Sustainable Boundary(S)
A A‟
Consumption
PPC
Q2
Q1
A‟
PPC OS=0
Q3 A
0 d1 S d2 d3
Environmental Amenity(E)
Figure 1.7: Natural Resource Budget Line and Sustainable Level5
-- Introduction of a new equation --
Further, there is a more important implication in this Figure 1.7 related to OS.
Under the definition stated above, the slope of the OS curve is found to be equivalent to
the velocity of resource reproduction. Hence, the following equations are defined as a
condition for sustainable management of renewable resources.
C ≦ ΔOS*E + S therefore, E ≧ (C – S)/ΔOS
This new equation6
eloquently tells us the relations among the reproduction
velocity, sustainable level and consumption. True sustainable management thus must
satisfy this equation. In the Figure 1.7, the level of consumption which satisfies this
condition is below Q3.
5
A is the original indifference curve when environmental amenity is considered as externality to its
economy. A‟ is the optimal indifference curve that takes into account the value of environmental
amenity. If the indifference curve touches the PPC (Production Possibility Curve) to the left of S line,
the resources can be managed sustainably. This is endorsed by the relation d1 < S < d2. It is clear
that the resource sustainable point requires much less amount of resource consumption compared with
the case where sustainable management in a general sense is attained.
6
In this equation, C stands for Consumption, E stands for Environmental Resources, S stands for
Sustainable Level, and OS stands for Original Sustainability.

- 23 -
1.2. Theories of collective actions and International Agreements
It is generally understood that the negotiations at international organizations are
explained by the economic theories of collective actions [Field, p.448-470].
According to game theories, when there are gains to be made by defecting, rationale
behavior by participants will result in the most undesirable outcome for all the
participants. This indeed seems to be true in the negotiation process of distribution of
contribution among international organization related to natural resources. Each
member country always tries its best to make its own contribution as low as possible at
the expenses of other members' contributions. If so, no arrangements taken by
international organizations can succeed.
In addition to the problem of public goods as stated above, it is necessary to
understand the collective action problem in order to fully realize the economic
problems that tropical environmental natural resources are facing. The collective
action problem was first addressed by Olson (1965) in relation with the provision of
public goods by organizations. The essence of collective action problem lies in
inconsistency between individual and collective interests. It is usually explained by
using game theory models as shown in Box 1.1.
The economic theory of collective action is the study related to the provision of
public goods through the collaboration of two of more individuals or organizations. A
vriety of forms can be considered based on the situations to which analysis is applied.
The theory is also concerned about the impact of externalities on the behavior of the
individuals or groups. A number of strategies can be considered under the theory with
regard to the collaboration and behavior which can be best illustrated under the
application of game theories.
Basic Concept of Game Theory
Theory of Collective Actions is very often explained through game theories.
In fact, game theories are the most plausible approach to explain the problems faced
under the collective actions. As it has been explained in the previous section, public

- 24 -
goods are free to be exploited by anyone once they are provided. Therefore, it would
be beneficial, or economically profitable, not to contribute to the provision of these
public goods but to free-ride on other countries. This can be called the “free-ride
strategy.” In the Box 1.1, left columns indicate economic values for a country A when
it contributes and right columns indicate the value when A free-rides. Similarly, the
upper columns indicate the value for a country B when it contributes and the lower
columns indicate the values when B free-rides. There are several game patterns but
the game illustrated in the Box 1.1 is most commonly used. In this game, the worst
outcome is unavoidable if both countries adopt individually the best option that is to
defect (free- ride).
Hence, collective action theory, by being illustrated by the above basic concept
of game theories, tells us that the desirable result will not be reached when individual
participants try to maximize its own economic benefit. This is considered particularly
true for international community because there is no authority in the international
community that can force its individual members to choose an option that can
maximize the benefit for the overall community. When a desirable result is obtained
through collaboration, the game participants could have adopted the “collaboration
strategy.” The collaboration strategy can be taken when certain conditions are provide
to avoid the free-ride strategies. The main purpose of the game theory study is to find
out the equilibrium points that can be achieved through collaboration strategies and the
conditions which would make the strategy workable. There are a variety of strategies
that have been considered by the past economists. For example, a game which could
threaten the players for the expectation of worst scenarios is often called the “game of
chicken.” “Prisoner‟s dilemma” is of course the base of the game of chicken. “Zero
sum” or “non-zero sum” games are another kinds of basic game formats. It is easily
envisaged that a free-ride game can be generally expected under a non-zero sum game
if the value of the game tends to a highly beneficial ones for all the participants with
smaller differences of benefits among them. On the other hand, if the difference of
damages from the game is huge under a zero-sum game, the incentive to collaborate

- 25 -
would be larger than the above mentioned non-zero sum game. With different angles
of games, other types of strategies can be considered. Such games include
“simultaneous and sequential games,” “perfect information and imperfect information
games,” “symmetric and asymmetric games,” to list only a few. Thus, a variety of
game types is possible depending on the conditions or situations set forth for a game.
Perhaps, one of the best known concepts of collective action is the Nash equilibrium.
Nash equilibrium is defined as “the point where no player can do better by unilaterally
changing his or her strategy.” [Suziki, p.51] This thesis however does not have to
employ Nash equilibrium or many other types of games because the decision making
process of international organizations and member countries can be better explained
through basic “prisoner‟s dilemma” type games when the amount of trade benefit and
possible sanction are the only points in consideration for the countries in the open
global community as assumed in this thesis.
1.3. Coase Theorem
The Coase Theorem is generally defined as follows.
“As long as property rights are well-defined and as long as payments among
the parties are possible, the externalities will be taken into account by the parties and the
optimal result will occur. The party that gets the rights will be better off but the society
will have achieved the best possible result.” Or more formally, “When the parties
affected by externalities can negotiate costlessly with one another, an efficient outcome
results no matter how the law assigns responsibility for damages.”
Coase theorem is important in a sense that the market can achieve equilibrium
under certain condition for any kind of goods including environmental goods. As the
Coase theorem indicates, market economy will work properly if the property rights are
properly defined, but under international laws it is often not possible.
This is exactly the reason why international agreements are required.
International agreements can overcome this collective action problem by providing

- 26 -
necessary legal framework to which all member countries are requested to abide by.
Economic sanctions or other types of punishments can also be introduced to let the
agreements work properly.
However, the Coase Theorem has a problem in applying itself into the actual
market economy, because the Coase Theorem is based on the assumption that there is
no transaction cost in the process of determining the efficient equilibrium among
players which can be brought in under the properly assigned property rights. In the
real society, this never happens. In the real society, even though the property rights
are properly determined, it is often very difficult to identify them and to form consensus
among the players about the exact implications of the property rights. Courts are
always very busy for the civil cases related to property rights. Sometimes, the cost
and time that are needed to win the cases are more than the benefit that the defendants
of the case can obtain. In the case of international society, the transaction cost is
probably many times higher that domestic cases in a country, because the laws which
should form the basis of the property rights are different from country to country. If
the transaction cost is higher than the benefit at stake in the dispute, therefore, there
would be no equilibrium in the international market. The responsibility of the
international agreement is, therefore, to clearly define the property rights with regard to
the environmental goods which each organization is responsible for. However, this is
only the first step. As stated above, what is crucially important is to reduce the
transaction cost to a manageable and beneficial level to all parties concerned. This
would be possible if the organization is properly equipped with the mechanism to settle
disputes by overriding the sovereign rights of member countries. The World Trade
Organization (WTO) is the only organization that is equipped with such a mechanism
as of today.
1.4. Game Theory
As briefly mentioned in the above sections and illustrated in the Box 1.1, game

- 27 -
theory is a branch of applied mathematics that uses models to study interactions with
formalized incentive structures ("games"). It has applications in a variety of fields,
including economics, international relations, biology, political science, and military
strategy. Game theory is related to the study of the predicted and actual behavior of
individuals in games, as well as optimal strategies. Seemingly different types of
interactions can exhibit similar incentive structures, thus all exemplifying one particular
game.
The most well-known and basic game theory is called the prisoners‟ dilemma.
In this game, the reasonable and profit-making behavior of players always results in
catastrophe for all players. The environmental values are generally considered to be
trapped in this prisoners‟ dilemma. Therefore, it is important to know the mechanism
of game theories and apply them to environmental goods with a view to preventing
them from depletion in the international free market.
There is a more advanced game theory related to the conservation of
environmental goods, i.e., a cooperative game. A cooperative game is characterized
by an enforceable contract and games under this co-operative theory give justifications
of plausible contracts. The application of this theory to the international
environmental goods is particularly important because it would be possible for a market
to achieve sustainable level of equilibrium if the rules of the market are based on this
game. The purpose of the thesis is to find out if an international agreement can
provide conditions which will lead to plausible contracts among players of a market for
environmental goods.
The Figure 1.8 indicates the case when the country A damages the
environmental quality of a certain domestic natural resource at the point d1 and
international community wish to regulate the damage to be reduced to the level of d2.
If property rights are properly defined to the global community, the damage level can
decrease from d1 to d2 automatically but in the international society A is free to choose
d1 as its best economically beneficial level because A has the absolute sovereign power

- 28 -
to decide the level of its economic activities.
In other words, as Ostrom indicated in her 1990 article, collective action
problem can be solved if proper negotiation or information exchange can be made
before each participant to the game decides its own individual action. In the case of
Box 1.1, the right bottom is the outcome reached in the absence of international
agreement, and the top left can be the outcome obtained under an international
agreement.

- 29 -
Box 1.1: International Agreement and Game Theory
Country A
Contribute Free Ride
I II
Contribute 10 10 5 15
Country B
Free Ride 15 5 0 0
III IV
IV is the result without an international agreement
I is the result with an international agreement

- 30 -
Contribution $
MAC
MDG
MDA
0 d2 d1 Environmental Damage
Figure 1.8. Contribution and Depletion Relation7
7
MDA is the Marginal Damage Curve for Country A.
MDG is the Marginal Damage Curve for the Global Community.
MAC is the Marginal Abatement Cost Curve which represents the cost to alleviate the
environmental damage.
The relation d1 > d2 illustrates that the global community sees the reduction of
environmental damage more cost effectively because the damage reduction does not cause any
negative impact to their economy. On the other hand, the source country considers the cost of
damage reduction higher because its domestic industries would be affected if the cause of the
environmental damages is to be reduced.

- 31 -
1.5. Other economic concepts and theories
There are several other economic concepts and related theories that can be
utilized to analyze the arrangements to be taken by international organizations for
protection of natural environmental resources. Some of the examples are the concept
of opportunity cost, concept of monopolistic market and concept of elasticity of
substitution, to name only a few, and their related theories. Apparently, it is necessary
to take into account the opportunity cost of CPRs consumption in order to determine
true value of the resources. Also, it is important to know the mechanism of OPEC
type production cartel because commodity agreements basically support the idea of
production cartel to maintain a profitable international price for producing countries.
If the price of a natural resource is to be controlled by an international organization, it
would be imperative to know the price elasticity of substitution to measure the impact
of price changes of substitute products onto the products made from the natural
resource. Here, the theory of monopolistic market and its implication to international
organization are briefly explained.
What would happen in a natural resource market if the responsible organization
introduces price intervention measures such as quota allocation? The following
general theory of monopolistic market can provide an answer to this question.
The Figure 1.9 illustrates the market equilibrium level (E) and the level
monopolistically set by producers (M). The monopolistic production level is lower
than the market oriented production level; therefore, the resource can be conserved by
the introduction of monopolistic measures. The monopolistic price level is higher
than the market price level; therefore, the producers can receive sufficient revenue
despite reduction in production.
The most serious problem to be caused by such production restrictive measures
is the possibility of chiseling. Individual producing member countries find attractive
to increase their quota allocation because the producers' preferred production amount at
the price level P2 is at Q3. If many producing countries try to increase their

- 32 -
production above their allocation quota, the effect could be devastating for their
resources asset. If all countries try to gain extra revenue by selling products at the
price P2, production level will be Q3 which is much higher than the level produced
under free market.
Hence, for such production restrictive measures are to be successful, strict
control over the producing member countries is imperative.
In connection, it would be beneficial to touch briefly upon the concept of
elasticity of substitution because the elasticity can affect the outcome of production
restriction measures under monopolistic market control.
Figure 1.10 shows the case the elasticity of substitution is high between an
environmental product and its substitution product. When the price ratio between the
two products is P1:p, quantity of the natural resources traded in the market is Q1 and
the substitution products at q1. Now let us suppose that the price of the natural
resource increased because of the price intervention arrangement by the responsible
international organization and the price ratio between the two products became P2:p.
If the elasticity of substitution is high between the two products, the indifference curve
touches the new budget curve (p-P2) at the point highly in favor of the substitution
products. Therefore, the quantity of the natural resource traded in the market now
greatly decreased from Q1 to Q2 while the quantity of the substitution trade increased
from p1 to p2.
Figure 1.11 shows the case the elasticity of substitution is low between two
products. In this case, both products decrease their respective quantity trade in the
market in accordance with the price change of the natural resource. Although the
quantity of the natural resource traded in the market decreased, the amount reduced is
much smaller than the case stated in the Figure 1.11. In the Figure 1.11, new quantity
traded in the market is Q2 for the natural resource and q2 for substitution products.
Thus, trade intervention measures do not always create desirable outcome for
natural resources. If the elasticity of substitution is high against substitution products,

- 33 -
price increase caused by the responsible international organization significantly shifts
the demand of the natural resource to substitution products. If this is the case, trade
intervention mechanisms would not achieve desirable outcome. It should be noted
that substitution product may not be one but there may several others that can substitute
the natural resource. Artificial products such as metal or plastic can also act as
substitution products in the market. It is necessary to know the elasticity of
substitution with all these products if the market intervention through the mechanisms
of international organizations is to succeed.

- 34 -
Natural Resource Price ($)
D S
P2 M
P1 E
0
Q2 Q1 Q3 Export Quantity
Figure 1.9: Export Quota Allocation and Market8
8
The market equilibrium is at the point of Q1. When the export quota, a monopolistic
measure, is applied under Commodity Agreements, the production quantity moves from Q1 to
Q2 and the market price goes up from P1 to P2. However, if the quota system lacks a proper
mechanism of sanctions, producing countries will try to increase the amount of their production
to gain more cash at the high price. Then the production increases from Q2 to Q3 which may
cause undesirable depletion of the resources they export. This kind of artificial price control
system is, therefore, environmental damaging if the mechanism is not controlled by proper
penalty or sanction system. When the system is properly installed, the price control mechanism
can benefit both for the conservation of natural resources and the economic development of
developing countries, because the production stays at Q2 under the proper management.

- 35 -
Substitution products (ton)
p
q2
q1
0 Q2 P2 Q1 P1 Resource (ton)
Figure 1.10: Elasticity of Substitution (High Elasticity)9
Substitution Product (ton)
p
q1
q2
0 Q2 Q1 P2 P1 Resource (ton)
Figure 1.11: Elasticity of Substitution (Low Elasticity)
9
Figure 1.10 and 1.11 just illustrates that the market force sometimes work to the unplanned or
undesirable direction for the conservation of natural resources. These are important factors
when considering the actual impact of trade or environmental measures set under international
organizations but do not necessarily considered as economic externality which causes
environmental degradation.

- 36 -
1.6. Application of Economic Theories to Environmental Conservation
1.6.1. Sustainability and Budget Line-Case Study for Forest Conservation -
In this section 1.6, application of the above theories to international
organization‟s control mechanisms and its surrounding economic situation would be
examined. Generally, producing countries tend to assert that a large amount of
compensation is needed from consuming countries if the latter request the former to
forgo a part of economic values being accrued from exploiting the natural resource,
while consuming countries tend to request that producing countries also take
responsibility to protect global environment.
In this context, there have been two unofficial estimates of natural resource
values provided by private researchers. One research conducted in 1992 estimated the
amount to be needed to achieve the targeted conservation of tropical forests would be
around 400 million US dollars per year. According to this research, the net required
amount is 300 million dollars because 100 million dollars are already being provided.
The other research estimated that 1.5 billion US dollars per year is needed [Barbier et al,
p.140-142].10
Before actually applying the above data with economic theories, it would be
necessary to introduce some other background figures related to tropical forests
depletion as an example. Tables 3.3. and 3.6. in the Chapter 3 tell us that overall
tropical forests annual depletion rate is 0.8%, while its increase rate by plantation is
approximately 0.2% during 1980 and 1990. Therefore, annual net depletion rate is
considered to be approximately 0.6%. Figure 1.12 illustrates current and future
maximum production curves (budget lines) between tropical timber net consumption
and forest exploitation. Naturally, as long as net depletion rate is a positive figure, this
budget line will eventually shrink to the left of the sustainable boundary of S. If the
global tropical forests plight becomes this stage, they can no longer provide sufficient
10
The first research was made in 1992 by World Foundation for Environment and
Development – WFED. The second research was made by World Conservation Union–IUCN.

- 37 -
environmental services, such as sink capacity of CO2, to the global community even
though the rate of net depletion then becomes zero.
Net Consumption (Depletion)
Sustainable Boundary (S)
2020 budget line (R=0.6)
A
2020 budget line (R=1.2)
B
2000 budget line
0 Environmental Values
Figure 1.12: Current and Possible Future Budget Lines11
11
Even though the production curve shrinks, sustainable management is still possible if the
acknowledged value of environment increases and accordingly the level of consumption
decreases which is indicated by the movement from A to B in the figure.

- 38 -
Forest Area (million ha)
2515 R <0
E00
2110 R=0
E20b Gradual Reduction Curve
S Sustainable Boundary
E20a
R=0.6 R=0.3
R=1.2
0
1965 2000 2020 2050 2100 Time
Figure 1.13: Long-term Tropical Forests Depletion Perspectives12
In this connection, the number of years required for complete depletion under
this current net depletion rate is calculated as follows:
Case 1. 0.6% per year (current rate)
(Years) (Depletion)
10 years 6.2%
30 years 19.7%
50 years 34.9%
68 years 50.0%
116 years 100%
12
This diagram just simply illustrates that sustainable management of forests will not be
realized in the year 2020 if the rate of depletion accelerates, while it is still possible under the
current depletion rate. However, in order to maintain the forest management truly sustainable,
the rate has be reduced to a substantially low level.

- 39 -
If the rate changes to 0.3 and 1.2, the following time spun for complete
depletion is expected.
Case 2. 0.3% per year (improved rate)
(Years) (Depletion)
10 years 3.0%
30 years 9.4%
50 years 16.2%
136 years 50.0%
232 years 100%
Case 3. 1.2% per year (deteriorated rate)
(Years) (Depletion)
10 years 12.7%
30 years 43.0%
34 years 50.0%
50 years 81.6%
59 years 100%
The above three cases are illustrated in the Figure 1.13. In any case, as long
as the annual net depletion rate is positive, tropical forests are doomed to be wiped out
completely soon or later, most likely within a hundred years. As the Figure 1.13
shows, net depletion rate has to become zero at a point in the near future if the tropical
forests are to be sustainably managed. What is generally envisaged to realize this
Gradual Reduction curve in the Figure 1.13. It is a simple fact that either or both
reduction in depletion rate and improvement in plantation rate need to be achieved for
realization of this goal.
The level of efforts needed by international community depends heavily on
where the sustainable boundary level is. If the level S is much lower than the one in
the Figure 1.13, the global community can spend much longer years to realize this goal.

- 40 -
It may not have to be the year 2010. If the level is already higher than current stock
level, it is imminent for them to avert the direction of depletion to increase the total
amount of tropical forests.
Some of the variations of the Figure 1.13 are illustrated in the Figure 1.14 and
1.15. The Figure 1.14 is the case the international community decides the sustainable
level of tropical forests for its 2010 year target is the level of 2000 when this target was
being formulated [ITTO, 2003, p.38]. In this case, the tropical forest depletion has to
be reduced back to the level of S00 curve in the Figure 1.14 by the year 2010. This
scenario has become more and more unlikely as the forest depletion has not stopped
until today.
Figure 1.15 illustrates the case the international community decides the
sustainable level be much higher than the S00 level. This may be possible because
most of the consuming countries consider that tropical forests in 2000 were already
over-exploited. In this case, tropical forests depletion rate has to become negative to
push the depletion curve up to the level of Sh in the Figure 1.15. This scenario has
become virtually impossible to be achieved by the year 2000. Based on this reality,
some countries started to demand that the target year be postponed from 2010 to a later
year.

- 41 -
2515
2110 S00
S00
S10 S10
R=0.6
0 2000 2010 2116 Year
Figure 1.14: The case sustainable level is set at 200013
2515 Sh
2110 S00
S00
R=0.6
0 2000 2010 2116 Year
Figure 1.15: The case sustainable level is much higher than present level
13
It is imperative to note that during the 2000-2010 period, the marginal cost over the
increased quantity, i.e., ΔC/ΔQ, is much higher in the Figure 1.15 than 1.14. This is the cause
of the game variation to be stated in the application chapter.

- 42 -
- An innovative approach -
Figure 1.16 indicates MAC (marginal abatement cost) presently recognized by
consuming countries, MDp (marginal damage of producers) perceived by the producing
countries, and MDg (marginal damage of global community). All of these are
hypothetical curves, and it should be noted that it is a new approach to depict the
relations between an individual country and the global community. Traditional
marginal damage function is basically for the relations between individual countries but
not with the global community. In that sense, the Figure 1.16 is very innovative and
most suited to see the relations between an international organization and one of its
individual member countries. The current level of forest depletion is considered to be
occurring at the level d1 where these two lines intersect. The amount being paid to
keep this level of forest depletion is set at 100 million US dollars. Now, let us suppose
that the global community decides that the sustainable level of forest exploitation
should be at the point S and the corresponding amount of contribution annually
required is 400 million US dollars. In order for this to happen, MDp must shift
upwards from MDp to MDg in the Figure 1.16, which implies that consuming countries
are expected to contribute extra 300 million US dollars to keep this level.
Figure 1.17 shows the case that 1.5 billion US dollars are required to achieve
2010 year target. It simply indicates that the MDg curve must make a large shift for
achieving level S of forest depletion. The corresponding amount, i.e., 1.5 billion US
dollars, needs to be contributed from consuming countries under this case.
Figure 1.18 is the case that MDp remains the same level and MAC shifts
downward to achieve the level S. For this to happen, producing countries need to
provide measures or fund to alleviate the burden of consuming countries. As Coase
theorem indicates, if the property rights of changing the level of environmental quality
are properly given to consuming countries, then this becomes a realistic case.
However, in reality, it is the producing countries that have perfect sovereign over their
internal natural resources. The Figure 1.16 is the case that the property rights are

- 43 -
properly given to producing countries. Here, in accordance with Coase theorem,
MAC curve remains the same and MDp curve shifts to MDg as responsibility of
consuming countries.
An interesting finding is that the Figure 1.18 is unrealistic in this case, while
traditional theory tells us that this type of transactions can take place as often as those
depicted in the Figures 1.16 and 1.17. Figure 1.18 is unrealistic because the global
community, more precisely an international organization, is considered a recipient of
fund and benefit from a member country. From this point alone, this approach should
be considered innovative.

- 44 -
Contribution (Bn $ / year)
MAC MDg
0.4
MDp
0.1
0 S d1 Depletion
Figure 1.16: Contribution and Sustainable Level of Resource Depletion14
Contribution (Bn $ / year)
MAC
1.5
MDg
MDp
0.1
0 S d1 Depletion
Figure 1.17: Contribution and Sustainable Level of Resource Depletion
14
Figures 1.16 and 1.17 are basically the same function. However, since the amount of fund
is needed for forest conservation is a key issue, both cases are herewith presented. In this
thesis, the Figure 1.17 is used as a basic model. It should be noted that these figures are
innovative in a manner that compares an individual country and international organization,
which is represented by the global community.

- 45 -
Contribution (Bn $/ Year)
MAC1
MDp
0.1 MAC2
0.01
0 S d1 Depletion
Figure 1.18: Contribution and Sustainable Level of Resource Depletion15
15
While the Figures 1.16 and 1.17 explain that the global community owes financial
contribution, Figure 1.17 illustrates the case under which a producing member country shoulder
the financial responsibility. Since the property right is given to a producing member country,
Figure 1.18 is an unrealistic case.

- 46 -
1.6.2. Game theory scenarios and possible contribution arrangements of
international agreements
In this thesis, two basic scenarios are introduced. The first scenario is
assumed for the case where an international organization conducts its conservation
activities utilizing the fund provided from both consumers and producers of the natural
resource. Since it is generally recognized that the game theory is the best suited
economic theory to examine the effects of economic externalities which include
environmental resources, the game theory is herewith employed to analyze the
effectiveness of the international organization [Suzuki, p.67-69]. For each game
theory scenario for producers of environmental resources, the second scenario is
introduced to examine the effect of fund transfer from consumers to producers as a
means of compensation. The case 1 is the game under which producers and
consumers are assumed to share the same environmental value in the resources.
Under the case 2, producers are assumed to identify no value in the environmental
assets. Producers are assumed to identify the half as much environmental value as
consumers do under the case 3.
(a) Scenario 1
Here, 1500 million US dollars is assumed as an annually needed amount for
global conservation of an environmental resource. This possibly implies that
sustainable environmental value of the resource is recognized to be US$ 1500 million
and that the magnitude of damage to the environment is also US$ 1500 if there is no
contribution made to protect the resource. This relation between contribution and
environmental value under the above assumptions can be put in an equation as shown
in the Figure 1.19 (Scenario 1).
Based on this equation, a game illustrated in the Box 1.216
would be employed
to examine possible distribution of contribution to the fund set by the memes of an
16
See Box 1.2 and others to check the actual function of Box 1.1.

- 47 -
international organization. The global environmental value in columns I, II and III in
the Box 1.2 is 1500 million dollars because this is the assumed amount to achieve
sustainable level of the resource management. Any amount under this amount is
assumed hereby unsatisfactory.
In order to simplify the games, the following two conditions are assumed for all
games to be played in this thesis hereafter.
(i) When Consumers and Producers perceive different value in
environmental quality of the resources, the larger value is presumed to be equivalent to
the global value attached to the resources.
(ii) When either Consumers or Producers have intention to make
contribution to the fund, the fund will be fully supplied even though the other party
does not make any contribution at all.
(iii) Factor "e" adopted in the model v of the 1990 Ostrom's thesis is
assumed to exist. Therefore, the games played in this thesis do not fall into prisoners‟
dilemma. In this thesis, the "e" is defined as the cost of enforcement by penalty and it
will be activated when games fail due to the chiseling by member countries.
(iv) Further in this thesis, a variation of "e" is introduced. It is symbolized as
“a” and it stands for the self-arranged arbitration system which enforce the arbitration
based on the mutual agreement of members concerned on disputes. The arbitration
system is assumed to exist behind all games and to provide maximum transparency of
negotiation and information.
The left figure in each column indicates the total value for consuming countries
and the right figure indicates the total value for producing countries. Based on the
above-mentioned assumptions, either consumers or producers are expected to provide
entire contribution in the columns II and III. Both groups would contribute the same
amount in the column I, while both provide no contribution in the column IV.

- 48 -
Global Value of Conservation
Gv = 2*(Cp + Pp) - 1500
1500 S
0 Contribution
750 1500
-1500
Gv = Global Value of an environmental resource
Pp = Contribution paid by Producing Countries
Cp = Contribution paid by Consuming Countries
It should be noted that based on the Figure 1.7, the following equation should
always be established.
Gv = E ≧ (C – S)/ΔOS
Figure 1.19: Relation between Fund and Global Environmental Value17
/ Scenario 1 (Gv = 2*(Cp + Pp) - 1500)
17
It is necessary to note that the coefficient is set at 2 because it is considered that the averting the
course of depleting direction is more difficult when the current plight is already below the sustainable
level. In reality, the Gv curve is not a direct line but a curve because the utility of resources changes
with the absolute amount of stock of the resource.

- 49 -
Box 1.2: Contribution to the Fund and Game Theory18
Scenario 1 (Gv = 2(Cp + Pp) 1500)
Producing Countries
Contribute Not contribute
Contribute
Consuming Countries
Not contribute
I (Gv)
Cv Pv
II (Gv)
Cv Pv
III (Gv)
Cv Pv
IV (Gv)
Cv Pv
(million $)
Gv = Global Value Gained from Conservation
Cv = Total Value for Consumers
Pv = Total Value for Producers
Cp = Contribution by Consumers
Pp = Contribution by Producers
Gvc = Global Value Perceived by Consumers
Gvp = Global Value Perceived by Producers
e = Cost of enforcement by penalty (e is applied for non-contributors)
a = Cost of enforcement by self arranged arbitrator
(When a>0, the game is under the control of the arbitrator)
Gv = 2(Cp + Pp) - 1500
Cv = Gv - Cp
Pv = Gv - Pp
It is assumed that either Consumers or Producers provide entire contribution
when either Cp or Pp is zero.
18
As in the case for Figure 1.19, Gv = E ≧ (C – S)/ΔOS is always needed to be satisfied.
This will be the same for the all of the subsequent games in this thesis.

- 50 -
The Box 1.3-1.5 illustrate how the budget allocation to the fund can be made
between producing countries and consuming countries in accordance with theory of
collective actions by using the game described in the Box 1.2. The Box 1.3 illustrates
the case that both producers and consumers value the environmental aspect of the
natural resource equally. Fifteen hundred million US dollars is assumed to be the
amount required to the fund. In this Box, it is presumed that both producers and
consumers are requested by the organization to contribute 750 million US dollars each
to acquire 1500 million US dollars equivalent of environmental services from the
resource. It is also presumed that the value of the environmental services is
recognized by the both sides equally beneficial. In this game, as a traditional game
theory indicates, the logical result will be the column IV in which both do not
contribute. If the both sides behave individually to obtain the maximum benefit for
themselves, this is the inevitable result. In other words, if the contribution is left to the
market principles, the fund will inevitably fail. Nevertheless, it is clear that the
column I is a better result than the column IV for both players of the game. This better
result can be obtained if they cooperate through communication and information
exchange. Ostrom (Governing the global commons, 1990) introduced a very detailed
analysis of the game theory and concluded that a built-in enforcement mechanism
(factor "e") and proper communication can prevent games from reaching less desirable
results. ITTO is indeed an organization where member countries abide by the biding
rules and exchange information to seek the best arrangements for them to induce
maximum benefit without relying on market forces. It should be noted that
commodity agreements are accepted as an exception of free trade under GATT XX (h).
GATT allows commodity agreements to come up with antimarket measures. Hence,
it would be possible for the fund to receive sufficient contributions from member
countries just like the game illustrated in the Box 1.3.
Box 1.4 illustrates the case producing countries do not identify any values in
the environmental assets and do not have any incentive to contribute to the fund. This
is actually the case close to reality faced among members of international organizations

- 51 -
in general, because producing countries generally demand that the consuming countries
bear all the expenses for the fund as compensation for their opportunity costs of the
resource utilization. In the game illustrated in the Box 1.4, it will not be possible for
producing countries to make contribution to the fund even though both players hold
proper communication each other. Under this game, the only desirable result for
environment protection is the column II where consumers bear entire contribution.
Unfortunately, when consuming countries believe the environmental quality is a
universal property; this is not likely to happen. Then, according to game theory, the
only possible result is the bottom right. This would be catastrophic for the global
community.
Box 1.5 illustrates the case producing countries identify only half of the
environmental value recognized by consuming countries. In this game, the best result
for environment conservation is either column I or column II, but for this to happen,
members must overcome the logical result of the column IV as predicted by the
traditional game theory. If they overcome it, it is left for the both parties to negotiate
and decide which one between I and II is to be chosen.
In realty, it would be very difficult to achieve conservation if producing
member countries do not recognize any value in environmental quality of the resource.
No matter how large the contribution from consuming countries is, damage to the
resource may not be alleviated under such a case. Cost estimation also tends to
become impractically high. This should be true from the general understanding that
an efficient outcome can not be obtained when there is no incentive to do so. Under
the fact that the environmental assets are CPRs or public goods, this would be
particularly true.
Therefore, it is necessary for international organizations to let both of their
producing and consuming member countries recognize that the efforts and cooperation
by both sides are needed to prevent the depletion of the resource which is
counter-beneficial for all countries in the world. In order to do this, further research

- 52 -
and negotiations are required. It is hoped that these researches and negotiations of
international organizations will lead to the creation of common goal and common value
for all members. The above case in the Box 1.4 had better be avoided. If all member
countries recognize the same environmental value of the resources, the games like in
the boxes 1.3 and 1.5 would become possible.

- 53 -
Box 1.3: Same environmental value for both consumers and producers
Case 1: Gv = Gvc = Gvp, a>0, e=0 (e may turn >0 when game fails)
Producing Countries
Contribute Not Contribute
Contribute
Consuming Countries
Not Contribute
I (1500)
750 750
II (1500)
0 1500
III (1500)
1500 0
IV (-1500)
-1500 -1500
(million $)
I: Gv = 2*{750(Cp) + 750(Pp)} - 1500 = 1500
Cv = 1500(Gv) - 750(Cp) = 750
Pv = 1500(Gv) - 750(Pp) = 750
II: Gv = 2*{1500(Cp) + 0(Pp)} - 1500 = 1500
Cv = 1500(Gv) - 1500(Cp) = 0
Pv = 1500(Gv) - 0(Pp) = 1500
III: Gv = 2*{1500(Cp) + 0(Pp)} - 1500 = 1500
Cv = 1500(Gv) - 0(Cp) = 1500
Pv = 1500(Gv) - 1500(Pp) = 0
IV: Gv = 2*{0(Cp) + 0(Pp)} - 1500 = -1500
Cv = -1500(Gv) - 0(Cp) = -1500
Pv = -1500(Gv) - 0(Pp) = -1500
Game result: Success, because Column I Pv > Column IV Pv.
Column II and III are possible if either side agrees to pay the entire amount under
political consideration.

- 54 -
Box 1.4: No environmental value for producers
Case 2: Gv = Gvc, Gvp = 0, a>0, e=0 (e may turn >0 when game fails)
Producing Countries
Contribute
Consuming Countries
Not contribute
I (1500)
750 -750
II (1500)
0 0
III (1500)
1500 -1500
IV (-1500)
-1500 0
(million $)
I: Gv = 2*{750(Cp) + 750(Pp)} - 1500 = 1500
Cv = 1500(Gv) - 750(Cp) = 750
Pv = 0(Gv) - 750(Pp) = -750
II: Gv = 2*{1500(Cp) + 0(Pp)} - 1500 = 1500
Cv = 1500(Gv) - 1500(Cp) = 0
Pv = 0(Gv) - 0(Pp)/2 = 0
III: Gv = 2*{1500(Cp) + 0(Pp)} - 1500 = 1500
Cv = 1500(Gv) - 0(Cp) = 1500
Pv = 0(Gv) - 1500(Pp) = -1500
IV: Gv = 2*{0(Cp) + 0(Pp)} - 1500 = -1500
Cv = -1500(Gv) - 0(Cp) = -1500
Pv = 0(Gv) - 0(Pp) = 0
Game result: Failure, because the game falls into PD.
Column II is possible if Consumers agree to pay the entire amount under political
consideration. Column I is not possible because Column I Pv < Column IV Pv.

- 55 -
Box 1.5: Half environmental value for producers
Case 3: Gv = Gvc, Gvp = Gv/2, a>0, e=0 (e may turn >0 when game fails)
Producing Countries
Contribute
Consuming Countries
Not contribute
(1500)
750 0
(1500)
0 750
(1500)
1500 -750
(-1500)
-1500 -750
(million $)
I: Gv = 2*{750(Cp) + 750(Pp)} - 1500 = 1500
Cv = 1500(Gv) - 750(Cp) = 750
Pv = 1500(Gv)/2 - 750(Pp) = 0
II: Gv = 2*{1500(Cp) + 0(Pp)} - 1500 = 1500
Cv = 1500(Gv) - 1500(Cp) = 0
Pv = 1500(Gv)/2 - 0(Pp) = 750
III: Gv = 2*{1500(Cp) + 0(Pp)} - 1500 = 1500
Cv = 1500(Gv) - 0(Cp) = 1500
Pv = 1500(Gv)/2 - 1500(Pp) = -750
IV: Gv = 2*{0(Cp) + 0(Pp)} - 1500 = -1500
Cv = -1500(Gv) - 0(Cp) = -1500
Pv = -1500(Gv)/2 - 0(Pp) = -750
Column II and III are possible if either side agrees to pay the entire amount
under political consideration.

- 56 -
(b) Scenario 1b
Box 1.6 indicates the case the contributions from consuming countries are to be
given directly to producers. Producing member countries may claim compensation for
their opportunity cost if they have to give up their economic activities and development
schemes in achieving the sustainable development. In fact, economic development is
the key factor that causes depletion of natural resources. Here, it is assumed that the
said 1500 million US dollars needed to achieve the target include costs to compensate
the foregone value of opportunity cost for producers. Therefore, the fund needs to
supply cash to producing countries engaged in pursuing sustainable management of
their resources at the expense of their economic development. Under this scenario, the
relation between contributions and conservation value can be illustrated as show in the
Box 1.6 (Scenario 1b).

- 57 -
Box 1.6: Contribution to the fund and Game Theory
Scenario 1b (Gv = 2(Cp + Pp) - 1500)&(Pv = Gv - Pp + Cp)
Producing Countries
Contribute
Consuming Countries
Not contribute
I (Gv)
Cv Pv
II (Gv)
Cv Pv
III (Gv)
Cv Pv
IV (Gv)
Cv Pv
(million $)
Gv = Global Value Gained from Conservation
Cv = Total Value for Consumers
Pv = Total Value for Producers
Cp = Contribution by Consumers
Pp = Contribution by Producers
Gvc = Global Value Perceived by Consumers
Gvp = Global Value Perceived by Producers
e = Cost of enforcement by penalty (e is applied for non-contributors)
a = Cost of enforcement by self arranged arbitrator
(When a>0, the game is under the control of the arbitrator)
Gv = 2(Cp + Pp) - 1500
Cv = Gv - Cp
Pv = Gv - Pp + Cp
It is assumed that either Consumers or Producers provide entire contribution
when either Cp or Pp is zero.

- 58 -
Box 1.7, Box 1.8 and Box 1.9 respectively indicate the cases corresponding to
their scenario boxes 1.3, 1.4 and 1.5. Namely, Box 1.7 show the case both consumers
and producers perceive the same value in the resources as environmental assets. Box
1.8 shows the case producers do not see any environmental values in the resource.
Box 1.9 shows the case producers recognize half of the environmental value perceived
by consumers.
Under these games, total value for producers in the columns I and II is much
higher than the value obtained in the games 1.3 to 1.5 where consumers contributions
are not assumed to be disbursed to producers. Therefore, the possibility for producers
to free-ride and try to gain high value in the column II is much higher under this
scenario. In this sense, these games are considered to be more likely to fail in
protecting the resources. However, it is also possible to consider that more motivated
producers would negotiate hard with consumers and would succeed persuading
consumers into pay all the contributions. Then, the game will be settled in the column
II.
Further, here again, relaxation of game conditions as stated in Ostrom's 1990
article may make it possible for producers to participate in the fund. Since the value
for producers in the column I is higher than the games 1.3 to 1.5, the incentive for
producers to avoid column IV and try to realize the column I is also high. In this sense,
these games can be considered more likely to induce producers to contribute to the fund.
The most distinctive case is the game illustrated in Figure 1.9. In this game, the value
in the column I is equal to that in the column IV for producers; therefore, the producers
have less difficulty in contributing. In the game 1.4, the value for producers in the
column I was much lower than that in the column IV; therefore, it is more difficult to
expect producers to contribute under scenario 1a than 1b.

- 59 -
Box 1.7: Same environmental value for both consumers and producers
Case 1: Gv = Gvc = Gvp, a>0, e=0 (e may turn >0 when game fails)
Producing Countries
Contribute Not Contribute
Contribute
Consuming Countries
Not Contribute
I (1500)
750 1500
II (1500)
0 3000
III (1500)
1500 0
IV (-1500)
-1500 -1500
(million $)
I: Gv = 2*{750(Cp) + 750(Pp)} - 1500 = 1500
Cv = 1500(Gv) - 750(Cp) = 750
Pv = 1500(Gv) - 750(Pp) + 750(Cp) = 1500
II: Gv = 2*{1500(Cp) + 0(Pp)} - 1500 = 1500
Cv = 1500(Gv) - 1500(Cp) = 0
Pv = 1500(Gv) - 0(Pp) + 1500(Cp) = 3000
III: Gv = 2*{1500(Cp) + 0(Pp)} - 1500 = 1500
Cv = 1500(Gv) - 0(Cp) = 1500
Pv = 1500(Gv) - 1500(Pp) + 0(Cp) = 0
IV: Gv = 2*{0(Cp) + 0(Pp)} - 1500 = -1500
Cv = -1500(Gv) - 0(Cp) = -1500
Pv = -1500(Gv) - 0(Pp) + 0(Cp) = -1500

- 60 -
Box 1.8: No environmental value for producers
Case 2: Gv = Gvc, Gvp = 0, a>0, e=0 (e may turn >0 when game fails)
Producing Countries
Contribute
Consuming Countries
Not contribute
I (1500)
750 0
II (1500)
0 1500
III (1500)
1500 -1500
IV (-1500)
-1500 0
(million $)
I: Gv = 2*{750(Cp) + 750(Pp)} - 1500 = 1500
Cv = 1500(Gv) - 750(Cp) = 750
Pv = 0(Gv) - 750(Pp) + 750(Cp) = 0
II: Gv = 2*{1500(Cp) + 0(Pp)} - 1500 = 1500
Cv = 1500(Gv) - 1500(Cp) = 0
Pv = 0(Gv) - 0(Pp) + 1500(Cp) = 1500
III: Gv = 2*{1500(Cp) + 0(Pp)} - 1500 = 1500
Cv = 1500(Gv) - 0(Cp) = 1500
Pv = 0(Gv) - 1500(Pp) + 0(Cp) = -1500
IV: Gv = 2*{0(Cp) + 0(Pp)} - 1500 = -1500
Cv = -1500(Gv) - 0(Cp) = -1500
Pv = 0(Gv) - 0(Pp) + 0(Cp) = 0
Game result: In-between, because Column I Pv = Column IV Pv.
Column II is possible if Consumers agree to pay the entire amount under political
consideration. Column III is not possible because Column III Pv < Column IV Pv.

- 61 -
Box 1.9: Half environmental value for producers
Case 3: Gv = Gvc, Gvp = Gv/2, a>0, e=0 (e may turn >0 when game fails)
Producing Countries
Contribute
Consuming Countries
Not contribute
(1500)
750 750
(1500)
0 2250
(1500)
1500 -750
(-1500)
-1500 -750
(million $)
I: Gv = 2*{750(Cp) + 750(Pp)} - 1500 = 1500
Cv = 1500(Gv) - 750(Cp) = 750
Pv = 1500(Gv)/2 - 750(Pp) + 750(Cp) = 750
II: Gv = 2*{1500(Cp) + 0(Pp)} - 1500 = 1500
Cv = 1500(Gv) - 1500(Cp) = 0
Pv = 1500(Gv)/2 - 0(Pp) + 1500(Cp) = 2250
III: Gv = 2*{1500(Cp) + 0(Pp)} - 1500 = 1500
Cv = 1500(Gv) - 0(Cp) = 1500
Pv = 1500(Gv)/2 - 1500(Pp) + 0(Cp) = -750
IV: Gv = 2*{0(Cp) + 0(Pp)} - 1500 = -1500
Cv = -1500(Gv) - 0(Cp) = -1500
Pv = -1500(Gv)/2 - 0(Pp) + 0(Cp) = -750

- 62 -
The Figure 1.20 illustrates the case when producers compromise to take their
own measures to conserve environmental resources; thereby making it possible for
consumers to pay smaller amount of contribution. In the Figure, not only MD curve
changes from MDp to MDg2 but also MAC curve shifts from MAC1 to MAC2. It is
then observed that the Level S is achieved at around 100 million US dollars that is
cheaper than the level recognized in the game in the Figure 1.16. This outcome
should correspond to a few cases illustrated in the previous boxes such as column I in
the Boxes 1.3 and 1.7, the column I and II of the Boxes 1.5 and 1.9. On the other hand,
the current situation and the most likely agreement to be made between producers and
consumers is the case consumers bear all expenses which would be utilized by
producers to compensate their opportunity costs of forgoing economic values of the
resources utilization. This corresponds to the column II of the Box 1.4 and 1.8.

- 63 -
Contribution (Bn $/ Year)
MAC1
MAC2 MDg1 MDg2
MDp
0.4
0.1
0 S d1 Depletion
Figure 1.20: Contribution and Sustainable Level of Depletion19
(Case 4: Both consumers and producers share responsibility)
19
It is assumed that the self-established rules of arbitrator have a power over both producing
and consuming member countries for the cases of MAC2 and MDg2. The condition for the
cooperation under Ostrom‟s thesis, i.e., “e,” exists behind the cases over MDg2 and MAC 1 or
MDp and MAC2. None of these exist for the cases for MDp and MAC1.

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