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Does Wage Bargaining Justify Environmental Policy Coordination?

  • Aronsson, Thomas


    (Department of Economics, Umeå University)

  • Persson, Lars


    (Department of Economics, Umeå University)

  • Sjögren, Tomas


    (Department of Economics, Umeå University)

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    This paper analyzes the welfare consequences of coordinated tax reforms in an economy where a transboundary environmental externality and an international wage bargaining externality are operative at the same time. We assume that the wage in each country is decided upon in a bargain between trade-unions and firms, and the wage bargaining externality arises because the fall-back profit facing firms depends on the profit they can earn if moving production abroad. Using the noncooperative Nash equilibrium as a reference case, our results imply that the international wage bargaining externality may either reinforce or weaken the welfare gain of a coordinated increase in environmental taxation, depending on (among other things) how the reform affects the wage. For a special case, we also derive an exact condition under which a coordinated increase in the environmental tax leads to higher welfare.

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    Paper provided by Umeå University, Department of Economics in its series Umeå Economic Studies with number 754.

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    Length: 26 pages
    Date of creation: 03 Nov 2008
    Date of revision:
    Handle: RePEc:hhs:umnees:0754
    Contact details of provider: Postal: Department of Economics, Umeå University, S-901 87 Umeå, Sweden
    Phone: 090 - 786 61 42
    Fax: 090 - 77 23 02
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