This research compares economic incentives for sediment and wastewater management of upstream and downstream countries in a shared waterway under cooperative and noncooperative strategies. Asymmetry between the countries in terms of costs, damages and emissions influence the incentives to abate pollution. Along the 2000 mile U.S. Mexico border, water flow runs in many directions, with asymmetric flow and stock effects. The Tijuana River watershed shared by the U.S. and Mexico is one example where the prevailing water flow is from south (in Mexico) to north (in the U.S.) where the accumulation of pollution stock occurs. Hence, Mexico is the upstream country and the U.S. is the downstream country. Quantitative analysis through applied game theory assesses strategies to abate by the U.S. and Mexico. International cooperation on environmental problems yields two types of benefits. First, the free riding incentives are mitigated. Second, costs are reduced when abatement cost differ between the contracting countries. Several game sharing rules (Shapley Value, Chander Tulkens rule, Helsinki Rule, Egalitarian Rule) are analyzed. Financial transfers from two North American Free Trade Agreement (NAFTA) institutions are examined. Two NAFTA institutions, the North American Development Bank (NADBank) and the Border Environmental Cooperation Commission (BECC) finance clean up of shared wastewater and to a lesser extent sediment pollution with 75% grants originating from the U.S. Environmental Protection Agency to pay for pollution control, often in upstream Mexico.
Results show that steady state wastewater and sediment pollution is lowest with cooperation. As expected, the highest steady state pollution occurs under independent action (non-cooperation), where damages are highest for both countries. The net costs and damages are minimized through cooperation. In all cases of cooperation, transfer payments are positive from downstream to upstream that lead to reductions in the flow and stock of pollution.