Environmental fiscal competition under productdifferenciation and endogeous firm location

The purpose of this paper is to conduct a positive analysis of the effect of the pollution taxation on the cross-country location of firms, on the volume of production and on welfare. In particular, we focus on the environmental problem arising when the production generates strictly local pollution externalities. In this case, although there is no regional spillover of pollution, the environmental problem still affects the interregional or international policy since its national regulation determines the location of production. Thus, we turn our attention to the strategy behavior of the governments, which can compete in terms of their environmental policies in order to maximize the national welfare. Furthermore, we also analyze whether a supranational coordinating the environmental policy of its members can drive welfare up comparing to a situation with tax competition among governments. We show that the results depend crucially on the degree of differentiation between the products supplied by each firm.