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Environmental Policy When Market Structure And Plant Locations Are Endogenous

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  • Markusen, James R.
  • Olewiler, Nancy

Abstract

A two-region, two-firm model is developed in which firms choose the number and the regional locations of their plants. Both firms pollute and, in this context, market structure is endogenous to environmental policy. There are increasing returns at the plant level, imperfect competition between the "home" and the "foreign" firm, and transport costs between the two markets. These features imply that at critical levels of environmental policy variables, small policy changes cause large discrete jumps in a region's pollution ai:d welfare as a firm closes or opens a plant, or shifts production for the foreign region from/to the home-region plant to/from a foreign branch plant. The implications for optimal environmental policy differ significantly from those suggested by traditional Pigouvian marginal analysis.

Suggested Citation

  • Markusen, James R. & Olewiler, Nancy, 1990. "Environmental Policy When Market Structure And Plant Locations Are Endogenous," 1990 Annual meeting, August 5-8, Vancouver, Canada 270890, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    • Handle: RePEc:ags:aaea90:270890
    DOI: 10.22004/ag.econ.270890
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