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Protectionists, environmentalists, and the formation of environmental policy in an open economy

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  • Rauscher, Michael
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    Abstract

    In situations where the traditional instruments of trade policy are not available, protection for import-competing industries can be given only indirectly. One of the candidates of giving indirect subsidies is environmental regulation. The competitiveness of a domestic industry can be improved by low emission taxes, by low environmental taxes on the consumption of the industry's output, or by low quality standards that have to be met by the goods that are produced by this industry. The paper looks at these instruments in a partial-equilibrium setting. There are a domestic and a foreign industry that produce goods that are regarded as imperfect substitutes by the consumers. Firms are price takers. The government has five policy instruments at its disposal: the emission tax rate, taxes on the consumption of domestic and foreign goods, and environmental-quality standards for domestic and foreign goods. In a first step, the small-country case is addressed. Two lobby groups that are interested in influencing environmental policies are considered: the owners of an industry-specific factor and environmentalists. The process of regulatory capture is modelled via a poMcal-supportfunctLon approach. Two cases are distinguished. First, the lobbies capture only single policy instruments. Second, they capture environmental policy as a whole. It is seen that some counter-intuitive results turn up, and this is explained by the fact that lobbies and policy makers are interested in providing protection in the most efficient way. Then we look at the largecountry case where environmental policies affect the terms of trade. It is seen that regulatory capture may lead to welfare gains since lobbies sometimes happen to internalise part of the external effects arising in the international policy game.

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    Bibliographic Info

    Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 685.

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    Date of creation: 1995
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    Handle: RePEc:kie:kieliw:685

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    1. Mayer, Wolfgang, 1984. "Endogenous Tariff Formation," American Economic Review, American Economic Association, vol. 74(5), pages 970-85, December.
    2. Becker, Gary S, 1983. "A Theory of Competition among Pressure Groups for Political Influence," The Quarterly Journal of Economics, MIT Press, vol. 98(3), pages 371-400, August.
    3. Nitzan, Shmuel, 1994. "Modelling rent-seeking contests," European Journal of Political Economy, Elsevier, vol. 10(1), pages 41-60, May.
    4. Markusen, James R., 1975. "International externalities and optimal tax structures," Journal of International Economics, Elsevier, vol. 5(1), pages 15-29, February.
    5. Grossman, Gene & Helpman, Elhanan, 1993. "Protection for Sale," CEPR Discussion Papers 827, C.E.P.R. Discussion Papers.
    6. Jean-Jacques Laffont & Jean Tirole, 1988. "The Politics of Government Decision-Making: A Theory of Regulatory Capture," Working papers 506, Massachusetts Institute of Technology (MIT), Department of Economics.
    7. Krutilla, Kerry, 1991. "Environmental regulation in an open economy," Journal of Environmental Economics and Management, Elsevier, vol. 20(2), pages 127-142, March.
    8. Anthony Downs, 1957. "An Economic Theory of Political Action in a Democracy," Journal of Political Economy, University of Chicago Press, vol. 65, pages 135.
    9. Rauscher, Michael, 1991. "National environmental policies and the effects of economic integration," European Journal of Political Economy, Elsevier, vol. 7(3), pages 313-329, October.
    10. Maloney, Michael T & McCormick, Robert E, 1982. "A Positive Theory of Environmental Quality Regulation," Journal of Law and Economics, University of Chicago Press, vol. 25(1), pages 99-123, April.
    11. Bartsch, Elga & Thomas, Ingo & Rauscher, Michael, 1993. "Environmental legislation and the impact of lobbying activities," Kiel Working Papers 562, Kiel Institute for the World Economy.
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