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

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  • Driskill Robert

    () (Vanderbilt University)

  • Horowitz Andrew W.

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

Abstract

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."

Suggested Citation

  • Driskill Robert & Horowitz Andrew W., 2007. "The Pollution Haven Paradox: Can an Effluent Tax Improve both Profits and Welfare?," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 7(1), pages 1-18, July.
  • Handle: RePEc:bpj:bejeap:v:7:y:2007:i:1:n:30
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    Cited by:

    1. Amagoia Sagasta & José M. Usategui, 2015. "Purchase and rental subsidies in durable-oligopolies," Hacienda Pública Española, IEF, vol. 213(2), pages 11-40, June.
    2. Gregory E. Goering, 2012. "Taxation and Durable-Goods Monopoly: Does a Current Tax Influence Firm Behavior?," Review of Economics & Finance, Better Advances Press, Canada, vol. 2, pages 20-28, August.

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