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The Effects of Environmental Taxes on the Private and Social Incentives to FDI

In: Green Innovation and Industrial Organization

Author

Listed:
  • Mario Martínez Fernández
  • Rafael Moner-Colonques
  • Jose J. Sempere-Monerris

Abstract

We develop an imperfect competition model of trade with environmental damages where firms decide between foreign direct investment (FDI) and exports prior to competition in quantities. We shall also characterise countries’ choices according to welfare. The comparison of equilibria allows us to identify a potential market failure and whether the highest possible welfare is attained. Our analysis shows that an environmental tax equal to marginal damage brings private and social interests together and the highest possible welfare is reached in more cases relative to no intervention. Also, there is a tax, greater than the marginal damage, that eliminates the welfare dilemma, but a market failure remains. Finally, environmental taxes may influence firms’ internationalisation choices and eventually lead to lower environmental damages.

Suggested Citation

  • Mario Martínez Fernández & Rafael Moner-Colonques & Jose J. Sempere-Monerris, 2026. "The Effects of Environmental Taxes on the Private and Social Incentives to FDI," World Scientific Book Chapters, in: Joanna Poyago-Theotoky (ed.), Green Innovation and Industrial Organization, chapter 5, pages 99-124, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789819816033_0005
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    JEL classification:

    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics
    • Q55 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Technological Innovation
    • L16 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Industrial Organization and Macroeconomics; Macroeconomic Industrial Structure
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • F18 - International Economics - - Trade - - - Trade and Environment

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