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Environmental Policy When Market Structure and Plant Locations are Endo-genous

  • James R. Markusen
  • Edward R. Morey
  • Nancy Olewiler

A two-region, two-firm model is developed in which firms choose the number and the regional locations of their plants. Both firms pollute and, in this context, market structure is endogenous to environmental policy. There are increasing returns at the plant level, imperfect competition between the "home" and the "foreign" firm, and transport costs between the two markets. These features imply that at critical levels of environmental policy variables, small policy changes cause large discrete jumps in a region's pollution and welfare as a firm closes or opens a plant, or shifts production for the foreign region from/to the home-region plant to/from a foreign branch plant. The implications for optimal environmental policy differ significantly from those suggested by traditional Pigouvian marginal analysis.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3671.

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Date of creation: Apr 1991
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Publication status: published as Journal of Environmental Economics and Management, vol. 24, 1993, p. 69-86
Handle: RePEc:nbr:nberwo:3671
Note: ITI IFM
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  1. Markusen, James R., 1981. "Trade and the gains from trade with imperfect competition," Journal of International Economics, Elsevier, vol. 11(4), pages 531-551, November.
  2. Pethig, Rudiger, 1976. "Pollution, welfare, and environmental policy in the theory of Comparative Advantage," Journal of Environmental Economics and Management, Elsevier, vol. 2(3), pages 160-169, February.
  3. Misiolek, Walter S., 1988. "Pollution control through price incentives: The role of rent seeking costs in monopoly markets," Journal of Environmental Economics and Management, Elsevier, vol. 15(1), pages 1-8, March.
  4. Markusen, James R, 1975. "Cooperative Control of International Pollution and Common Property Resources," The Quarterly Journal of Economics, MIT Press, vol. 89(4), pages 618-32, November.
  5. Comolli, Paul M., 1977. "Pollution control in a simplified general-equilibrium model with production externalities," Journal of Environmental Economics and Management, Elsevier, vol. 4(4), pages 289-304, December.
  6. Buchanan, James M, 1969. "External Diseconomies, Corrective Taxes, and Market Structure," American Economic Review, American Economic Association, vol. 59(1), pages 174-77, March.
  7. Brander, James A. & Spencer, Barbara J., 1985. "Export subsidies and international market share rivalry," Journal of International Economics, Elsevier, vol. 18(1-2), pages 83-100, February.
  8. Jonathan Eaton & Gene M. Grossman, 1983. "Optimal Trade and Industrial Policy Under Oligopoly," NBER Working Papers 1236, National Bureau of Economic Research, Inc.
  9. Besanko, David, 1987. "Performance versus design standards in the regulation of pollution," Journal of Public Economics, Elsevier, vol. 34(1), pages 19-44, October.
  10. Asako, Kazumi, 1979. "Environmental Pollution in an Open Economy," The Economic Record, The Economic Society of Australia, vol. 55(151), pages 359-67, December.
  11. Dixit, Avinash, 1984. "International Trade Policy for Oligopolistic Industries," Economic Journal, Royal Economic Society, vol. 94(376a), pages 1-16, Supplemen.
  12. Burrows, Paul, 1981. "Controlling the monopolistic polluter: Nihilism or eclecticism?," Journal of Environmental Economics and Management, Elsevier, vol. 8(4), pages 372-380, December.
  13. Forster, Bruce A., 1977. "Pollution control is a two-sector dynamic general equilibrium model," Journal of Environmental Economics and Management, Elsevier, vol. 4(4), pages 305-312, December.
  14. Merrifield, John D., 1988. "The impact of selected abatement strategies on transnational pollution, the terms of trade, and factor rewards: A general equilibrium approach," Journal of Environmental Economics and Management, Elsevier, vol. 15(3), pages 259-284, September.
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