Environmental Policy Reforms and the Labor Market in a Global Economy
In this paper, we consider the welfare effects of environmental policy cooperation in a two-country economy. We assume that the countries finance their public expenditures by using distortionary taxes, and that the countries differ with respect to competition in the labor market. The purpose is to characterize the cost benefit rule for a policy reform, where the countries involved agree to slightly increase their expenditures on abatement. We show how the welfare effect of the policy reform depends on changes in environmental damage, employment and work hours. We also relate the welfare effects of policy cooperation to the characteristics of the fiscal policies in the prereform equilibrium.
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