Costly Pollution Abatement, Competitiveness, and Plant Location Decisions
The US-Mexico free-trade debate included some theoretical assertions that were then used as arguments against trade and investment liberalization. (1) Trade liberalization increases the degree to which production is internationally relocated in response to environmental restrictions (`environmental dumping'?). (2) Investment liberalization, leading to multinational firms, similarly increases the production and welfare response to costly environmental restrictions. This paper adapts an oligopoly model, in which multinationals can arise endogenously, to examine these arguments. The findings are: (1) Trade liberalization increases production sensitivity to costly environmental restrictions, but arguments against liberal trade on welfare grounds do not follow. (2) Multinationals do not increase the production-reallocation effect caused by environmental restrictions or regulations. The inter-firm reallocation of production by competitive market forces in the absence of multinationals is slightly larger than the intra-firm reallocation when multinationals are present. In addition, the paper finds that the form taken by cost increases is crucial: restrictions that fall on fixed costs (e.g., more efficient burners and motors) have much smaller effects on production and welfare than restrictions that fall on marginal costs (e.g., cleaner fuels).
|Date of creation:||Mar 1996|
|Date of revision:|
|Publication status:||published as Resource and Energy Economics 19 (1997): 299-320.|
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- James R. Markusen & Edward R. Morey & Nancy Olewiler, 1991.
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NBER Working Papers
3671, National Bureau of Economic Research, Inc.
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8380, University Library of Munich, Germany.
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- Michael Rauscher, 1995. "Environmental regulation and the location of polluting industries," International Tax and Public Finance, Springer, vol. 2(2), pages 229-244, August.
- Markusen, James R. & Rutherford, Thomas F. & Hunter, Linda, 1995. "Trade liberalization in a multinational-dominated industry," Journal of International Economics, Elsevier, vol. 38(1-2), pages 95-117, February.
- Rauscher, Michael, 1994. "Environmental Regulation and the Location of Polluting Industries," CEPR Discussion Papers 1032, C.E.P.R. Discussion Papers.
- Rauscher, Michael, 1994. "Environmental regulation and the location of polluting industries," Kiel Working Papers 639, Kiel Institute for the World Economy.
- Markusen, James R. & Morey, Edward R. & Olewiler, Nancy, 1995. "Competition in regional environmental policies when plant locations are endogenous," Journal of Public Economics, Elsevier, vol. 56(1), pages 55-77, January.
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