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Fiscal federalism and interjurisdictional externalities: New results and an application to US Air pollution

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  • Banzhaf, H. Spencer
  • Chupp, B. Andrew

Abstract

The economics of fiscal federalism has identified two book-end departures from first-best provision of a public good. Local governments may respond to local conditions, but ignore inter-jurisdictional spillovers. Alternatively, central governments may internalize spillovers, but impose uniform incentives ignoring local heterogeneity. We provide a simple model that demonstrates that the choice of pricing policy also depends crucially on a third factor, the shape of marginal costs of providing the public good. If marginal costs are convex, then marginal abatement cost elasticities will be higher around the local policies. This increases the deadweight loss of those policies relative to the centralized policy, ceteris paribus. If they are concave, then the opposite is true.

Suggested Citation

  • Banzhaf, H. Spencer & Chupp, B. Andrew, 2012. "Fiscal federalism and interjurisdictional externalities: New results and an application to US Air pollution," Journal of Public Economics, Elsevier, vol. 96(5), pages 449-464.
  • Handle: RePEc:eee:pubeco:v:96:y:2012:i:5:p:449-464
    DOI: 10.1016/j.jpubeco.2012.01.001
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    More about this item

    Keywords

    Fiscal federalism; Environmental federalism; Air pollution;
    All these keywords.

    JEL classification:

    • H4 - Public Economics - - Publicly Provided Goods
    • H7 - Public Economics - - State and Local Government; Intergovernmental Relations
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

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