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Endogenous Environmental Policy when Pollution is Transboundary

Author

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  • Joachim Fünfgelt

    () (Sustainability Economics Group, Leuphana University of Lüneburg, Germany)

  • Günther G. Schulze

    () (Dept. of International Economic Policy, University of Freiburg, Germany)

Abstract

We analyze the formation of environmental policy to regulate transboundary pollution if governments are self-interested. In a common agency framework, we portray the environmental policy calculus of two political supportmaximizing governments that are in a situation of strategic interaction with respect to their environmental policies, but too small to affect world market prices. We show how governments systematically deviate from socially optimal environmental policies. Taxes may be too high if environmental interests and pollution-intensity of production are very strong; under different constellations they may be too low. Governments may actually subsidize the production of a polluting good. Politically motivated environmental policy thus may be more harmful to the environment as compared to the benevolent dictators’ solution. In other cases it may enhance environmental quality and welfare beyond what a benevolent government would achieve.

Suggested Citation

  • Joachim Fünfgelt & Günther G. Schulze, 2011. "Endogenous Environmental Policy when Pollution is Transboundary," Working Paper Series in Economics 196, University of Lüneburg, Institute of Economics.
  • Handle: RePEc:lue:wpaper:196
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    References listed on IDEAS

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    Cited by:

    1. Liu, Liyuan & Peng, Fei, 2015. "Environmental Protection and Economic Growth: An Optimal Pollution Controlling Model," MPRA Paper 76261, University Library of Munich, Germany.

    More about this item

    Keywords

    Political economy; environmental policy; transboundary pollution; common agency; strategic interaction;

    JEL classification:

    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • F5 - International Economics - - International Relations, National Security, and International Political Economy

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