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The Pollution Haven Paradox: Can an Effluent Tax Improve both Profits and Welfare?

  • Driskill Robert

    ()

    (Vanderbilt University)

  • Horowitz Andrew W.

    ()

    (Sam M. Walton College of Business, University of Arkansas)

Stringent environmental taxes in high-income countries are assumed to drive dirty industries to low-income countries, but the empirical evidence for ``pollution havens" is surprisingly weak. We demonstrate that a government trying to prevent flight by a ``dirty" durable good monopolist can impose an effluent tax that is offset by a lump-sum subsidy so that both firm profits and host-country welfare are increased. The scheme exploits the Coase Conjecture insight: a durable goods monopolist has a time-consistency dilemma that limits its ability to restrict future output. In this environment the effluent tax provides a credible commitment that restricts future supply. We assert that the use of lump-sum subsidies in strategic location competition is consistent with this mechanism, and this paradigm may be an important piece of the ``pollution haven paradox."

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Article provided by De Gruyter in its journal The B.E. Journal of Economic Analysis & Policy.

Volume (Year): 7 (2007)
Issue (Month): 1 (July)
Pages: 1-18

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Handle: RePEc:bpj:bejeap:v:7:y:2007:i:1:n:30
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