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We propose a novel, distance- and density-dependent specification of externalities that captures spatial dynamics within and between neighboring land parcels. We apply the problem to the short- and long-distance diffusion and control of an infectious disease in two privately-owned and ecologically-connected vineyards. Using computational experiments to generate individual and aggregate payoffs, we show how strategic behavior affects diffusion of the disease and the expected present value of the resulting externality. Our results suggest that ignoring the withinparcel spatial dynamics in the model overestimates the social cost of an externality compared to a model that focuses on inter-parcel spatial dynamics only. We find a U-shaped relationship between manager heterogeneity and aggregate payoffs in the presence of an externality, suggesting both positive and negative impacts of increased heterogeneity on strategic behavior and welfare.


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