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Think locally, act locally: Can decentralized planning really achieve first-best in the presence of environmental spillovers?

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Author Info

  • Harrison Fell

    ()
    (Division of Economics and Business, Colorado School of Mines)

  • Daniel T. Kaffine

    ()
    (Division of Economics and Business, Colorado School of Mines)

Abstract

Strikingly, Ogawa and Wildasin (2009) find that in a model with heterogenous jurisdictions, interjurisdictional capital flows, and interjurisdictional environmental damage spillovers, decentralized planning outcomes are equivalent to that under a single centralized planner. Taken to its extreme this result renders international agreements such as the Kyoto Protocol irrelevant. We first show the critical importance of two key assumptions (no retirement of capital, fixed environmental damages per unit of capital) in obtaining this result. Second, we consider a more general model allowing for capital retirement and abatement activities and show that generally the outcome of a decentralized market differs from the solution of a centralized planner's social welfare-maximizing problem.

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File URL: http://econbus.mines.edu/working-papers/wp201307.pdf
File Function: First version, 2013
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Bibliographic Info

Paper provided by Colorado School of Mines, Division of Economics and Business in its series Working Papers with number 2013-07.

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Length: 18 pages
Date of creation: Aug 2013
Date of revision:
Handle: RePEc:mns:wpaper:wp201307

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Postal: Golden, Colorado 80401
Phone: (303) 273-3480
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Web page: http://econbus.mines.edu/
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  1. Marco Runkel & Thomas Eichner, 2010. "Interjurisdictional Spillovers, Decentralized Policymaking and the Elasticity of Capital Supply," FEMM Working Papers 100019, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
  2. Hikaru Ogawa & David E. Wildasin, 2007. "Think Locally, Act Locally: Spillovers, Spillbacks, and Efficient Decentralized Policymaking," CESifo Working Paper Series 2142, CESifo Group Munich.
  3. Oates, Wallace E. & Schwab, Robert M., 1988. "Economic competition among jurisdictions: efficiency enhancing or distortion inducing?," Journal of Public Economics, Elsevier, vol. 35(3), pages 333-354, April.
  4. Montgomery, W. David, 1972. "Markets in licenses and efficient pollution control programs," Journal of Economic Theory, Elsevier, vol. 5(3), pages 395-418, December.
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