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Environmental tax competition and welfare: the good news about lobbies

Author

Listed:
  • Philippe Bontems

    (INRAE, University of Toulouse Capitole)

  • Guillaume Cheikbossian

    (CEE-M (Université de Montpellier, CNRS, INRAE, Institut Agro.))

  • Houda Hafidi

    (Aix Marseille Univ)

Abstract

This paper focuses on the welfare effects of domestic and international lobbying in the context of two countries linked by both trade and pollution. We consider a reciprocal-markets model where, in each country, a domestic firm produces a polluting good, that can result in a cross-national environmental externality, and competes in quantities in each market with a foreign firm. Each government independently sets a pollution tax under political pressure from green and industrial lobbies à la Grossman and Helpman (Am Econ Rev 84(4):833–850, 1994). Our results mainly show that political pressure from domestic and/or international lobbies can help mitigate tax competition between the two countries, resulting in an improvement in social welfare. In fact, lobbying acts much like a strategic delegation device by changing the social welfare weights in the objective function of each government. The (potential) welfare-improving effect of political pressure depends on the relative strengths of the lobbies and on the nature of the strategic interactions in taxes.

Suggested Citation

  • Philippe Bontems & Guillaume Cheikbossian & Houda Hafidi, 2025. "Environmental tax competition and welfare: the good news about lobbies," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 65(1), pages 27-68, August.
    • Handle: RePEc:spr:sochwe:v:65:y:2025:i:1:d:10.1007_s00355-024-01565-8
    DOI: 10.1007/s00355-024-01565-8
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