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Can decentralized planning really achieve first-best in the presence of environmental spillovers?

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  • Fell, Harrison
  • Kaffine, Daniel T.

Abstract

It is generally accepted that decentralized policy choice in the presence of interjurisdictional spillovers is inefficient. 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 centralized planner. 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 the outcome of a decentralized market generally differs from the solution of a centralized planner׳s social welfare-maximizing problem.

Suggested Citation

  • Fell, Harrison & Kaffine, Daniel T., 2014. "Can decentralized planning really achieve first-best in the presence of environmental spillovers?," Journal of Environmental Economics and Management, Elsevier, vol. 68(1), pages 46-53.
    • Handle: RePEc:eee:jeeman:v:68:y:2014:i:1:p:46-53
    DOI: 10.1016/j.jeem.2014.04.001
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