Think locally, act locally: Can decentralized planning really achieve first-best in the presence of environmental spillovers?
Strikingly, Ogawa and Wildasin (2009) find that in a model with heterogenous jurisdictions, interjurisdictional capital flows, and interjurisdictional environmental damage spillovers, decentralized planning outcomes are equivalent to that under a single centralized planner. Taken to its extreme this result renders international agreements such as the Kyoto Protocol irrelevant. We first show the critical importance of two key assumptions (no retirement of capital, fixed environmental damages per unit of capital) in obtaining this result. Second, we consider a more general model allowing for capital retirement and abatement activities and show that generally the outcome of a decentralized market differs from the solution of a centralized planner's social welfare-maximizing problem.
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- Oates, Wallace E. & Schwab, Robert M., 1988. "Economic competition among jurisdictions: efficiency enhancing or distortion inducing?," Journal of Public Economics, Elsevier, vol. 35(3), pages 333-354, April.
- Hikaru Ogawa & David E. Wildasin, 2007.
"Think Locally, Act Locally: Spillovers, Spillbacks, and Efficient Decentralized Policymaking,"
CESifo Working Paper Series
2142, CESifo Group Munich.
- Hikaru Ogawa & David E. Wildasin, 2009. "Think Locally, Act Locally: Spillovers, Spillbacks, and Efficient Decentralized Policymaking," American Economic Review, American Economic Association, vol. 99(4), pages 1206-17, September.
- Hikaru Ogawa & David Wildasin, 2007. "Think Locally, Act Locally: Spillovers, Spillbacks, and Efficient Decentralized Policymaking," Working Papers 2007-06, University of Kentucky, Institute for Federalism and Intergovernmental Relations.
- Thomas Eichner & Marco Runkel, 2012.
"Interjurisdictional Spillovers, Decentralized Policymaking, and the Elasticity of Capital Supply,"
American Economic Review,
American Economic Association, vol. 102(5), pages 2349-57, August.
- Marco Runkel & Thomas Eichner, 2010. "Interjurisdictional Spillovers, Decentralized Policymaking and the Elasticity of Capital Supply," FEMM Working Papers 100019, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
- Thomas Eichner & Marco Runkel, 2010. "Interjurisdictional Spillovers, Decentralized Policymaking and the Elasticity of Capital Supply," CESifo Working Paper Series 3214, CESifo Group Munich.
- Montgomery, W. David, 1972. "Markets in licenses and efficient pollution control programs," Journal of Economic Theory, Elsevier, vol. 5(3), pages 395-418, December.
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