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Heterogeneous Harm vs. Spatial Spillovers: Environmental Federalism and US Air Pollution

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  • H. Spencer Banzhaf
  • B. Andrew Chupp

Abstract

The economics of environmental federalism identifies two book-end departures from the first-best, which equates marginal costs and benefits in all local jurisdictions. Local governments may respond to local conditions, but ignore inter-jurisdictional spillovers. Alternatively, central governments may internalize spillovers, but impose uniform regulations ignoring local hetero-geneity. We provide a simple model that demonstrates that the choice of policy depends crucial-ly on the shape of marginal abatement costs. If marginal costs are increasing and convex, then abatement cost elasticities will tend to be higher around the local policies. This increases the deadweight loss of those policies relative to the centralized policy, ceteris paribus. Using a large simulation model, we then empirically explore the tradeoffs between local versus second-best uniform policies for US air pollution. We find that US states acting in their own interest lose about 31.5% of the potential first-best benefits, whereas the second-best uniform policy loses only 0.2% of benefits. The centralized policy outperforms the state policy for two reasons. First, inter-state spillovers are simply more important that inter-state hetero-geneity in this application. Second, welfare losses are especially small under the uniform policy because elasticities are much higher over the relevant range of the cost functions.

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  • H. Spencer Banzhaf & B. Andrew Chupp, 2010. "Heterogeneous Harm vs. Spatial Spillovers: Environmental Federalism and US Air Pollution," NBER Working Papers 15666, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:15666 Note: EEE PE
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    Cited by:

    1. James Alm & H. Spencer Banzhaf, 2012. "Designing Economic Instruments For The Environment In A Decentralized Fiscal System," Journal of Economic Surveys, Wiley Blackwell, vol. 26(2), pages 177-202, April.
    2. Anping Chen & Nicolaas Groenewold, 2014. "The regional economic effects of a reduction in carbon emissions and an evaluation of offsetting policies in China," Papers in Regional Science, Wiley Blackwell, vol. 93(2), pages 429-453, June.
    3. Laura Levaggi & Rosella Levaggi & Carmine Trecroci, 2015. "Waste disposal and decentralisation: a welfare approach," Working papers 17, SocietĂ  Italiana di Economia Pubblica.

    More about this item

    JEL classification:

    • H4 - Public Economics - - Publicly Provided Goods
    • H7 - Public Economics - - State and Local Government; Intergovernmental Relations
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

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