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Noncooperative Equilibria in Regional Environmental Policies When Plant Locations are Endogenous

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  • James R. Markusen
  • Edward R. Morey
  • Nancy Olewiler

Abstract

A two-region model is presented in which an imperfectly competitive firm produces a good with increasing returns at the plant level, and in which shipping costs exist between the two markets. Production of the good causes local pollution, and regional governments can levy pollution taxes or impose environmental regulations. The firm decides. partly on the basis of these environmental policy variables, whether to maintain plants in both regions, serve both regions from a single plant or shut down. A non-cooperative equilibrium in regional environmental policies occurs when each region is choosing the environmental policy that maximizes its welfare given the environmental policy in the other region. Two types of harmful tax (regulatory) competitions are documented. If the disutility of pollution is high enough, each region will only want the polluting good produced in the other region and the two regions will likely compete by increasing their environmental taxes (standards) until the polluting firm is driven from the market. This is the case of "Not in my backyard". Alternatively, if the disutility from pollution is not as great, each region will realize that their welfare could decrease if their environmental policy causes the firm to not operate in their region. In this case, the regions will usually compete by undercutting each others pollution tax rates (environmental standards).

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4051.

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Date of creation: Apr 1992
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Publication status: published as Journal of Public Economics, Vol. 56, 1995, pp. 55-77.
Handle: RePEc:nbr:nberwo:4051

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References

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  1. Mitchell, Robert Cameron & Carson, Richard T, 1986. "Property Rights, Protest, and the Siting of Hazardous Waste Facilities," American Economic Review, American Economic Association, vol. 76(2), pages 285-90, May.
  2. Markusen James R. & Morey Edward R. & Olewiler Nancy D., 1993. "Environmental Policy when Market Structure and Plant Locations Are Endogenous," Journal of Environmental Economics and Management, Elsevier, vol. 24(1), pages 69-86, January.
  3. Wildasin, David E., 1988. "Nash equilibria in models of fiscal competition," Journal of Public Economics, Elsevier, vol. 35(2), pages 229-240, March.
  4. Markusen, James R, 1975. "Cooperative Control of International Pollution and Common Property Resources," The Quarterly Journal of Economics, MIT Press, vol. 89(4), pages 618-32, November.
  5. Charles M. Tiebout, 1956. "A Pure Theory of Local Expenditures," Journal of Political Economy, University of Chicago Press, vol. 64, pages 416.
  6. WILDASIN, David E., . "Interjurisdictional capital mobility: Fiscal externality and a corrective subsidy," CORE Discussion Papers RP -831, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  7. 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.
  8. Ignatius J. Horstmann & James R. Markusen, 1990. "Endogenous Market Structures in International Trade," NBER Working Papers 3283, National Bureau of Economic Research, Inc.
  9. Mintz, Jack & Tulkens, Henry, 1986. "Commodity tax competition between member states of a federation: equilibrium and efficiency," Journal of Public Economics, Elsevier, vol. 29(2), pages 133-172, March.
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Citations

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Cited by:
  1. Niels Nannerup, 1998. "Strategic Environmental Policy Under Incomplete Information," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 11(1), pages 61-78, January.
  2. Hilary Sigman, 2004. "Transboundary Spillovers and Decentralization of Environmental Policies," Departmental Working Papers 200416, Rutgers University, Department of Economics.
  3. James Alm & H. Spencer Banzhaf, 2012. "Designing Economic Instruments For The Environment In A Decentralized Fiscal System," Journal of Economic Surveys, Wiley Blackwell, vol. 26(2), pages 177-202, 04.
  4. Rauscher, Michael, 1994. "Environmental regulation and the location of polluting industries," Kiel Working Papers 639, Kiel Institute for the World Economy.
  5. Ana Espínola-Arredondo & Félix Muñoz-García, 2012. "When do firms support environmental agreements?," Journal of Regulatory Economics, Springer, vol. 41(3), pages 380-401, June.
  6. Nicole Gürtzgen & Michael Rauscher, 2000. "Environmental Policy, Intra-Industry Trade and Transfrontier Pollution," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 17(1), pages 59-71, September.
  7. Paul Missios & Ida Ferrara & Halis Murat Yildiz, 2011. "Inter-regional Competition, Comparative Advantage, and Environmental Federalism," Working Papers 027, Ryerson University, Department of Economics.
  8. Ulph, Alistair & Valentini, Laura, 2000. "Environmental regulation, multinational companies and international competitiveness," Discussion Paper Series In Economics And Econometrics 0037, Economics Division, School of Social Sciences, University of Southampton.
  9. Wayne B Gray, 1997. "Manufacturing Plant Location: Does State Pollution Regulation Matter?," Working Papers 97-8, Center for Economic Studies, U.S. Census Bureau.
  10. Uwe Walz & Dietmar Wellisch, 1996. "Strategic provision of local public inputs for oligopolistic firms in the presence of endogenous location choice," International Tax and Public Finance, Springer, vol. 3(2), pages 175-189, May.
  11. Barrett, Scott, 1994. "Strategic environmental policy and intrenational trade," Journal of Public Economics, Elsevier, vol. 54(3), pages 325-338, July.
  12. Arik Levinson, 2002. "Environmental Regulatory Competition: A Status Report and Some New Evident," Working Papers gueconwpa~02-02-07, Georgetown University, Department of Economics.
  13. Eyland, Terry & Zaccour, Georges, 2014. "Carbon tariffs and cooperative outcomes," Energy Policy, Elsevier, vol. 65(C), pages 718-728.

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