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Costly Pollution Abatement, Competitiveness, and Plant Location Decisions

  • James R. Markusen

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).

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File URL: http://www.nber.org/papers/w5490.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5490.

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Date of creation: Mar 1996
Date of revision:
Publication status: published as Resource and Energy Economics 19 (1997): 299-320.
Handle: RePEc:nbr:nberwo:5490
Note: ITI
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  1. Rauscher, Michael, 1994. "Environmental Regulation and the Location of Polluting Industries," CEPR Discussion Papers 1032, C.E.P.R. Discussion Papers.
  2. 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.
  3. Venables, Anthony J., 1985. "Trade and trade policy with imperfect competition: The case of identical products and free entry," Journal of International Economics, Elsevier, vol. 19(1-2), pages 1-19, August.
  4. Michael Rauscher, 1995. "Environmental regulation and the location of polluting industries," International Tax and Public Finance, Springer, vol. 2(2), pages 229-244, August.
  5. James R. Markusen & Edward R. Morey & Nancy Olewiler, 1991. "Environmental Policy When Market Structure and Plant Locations are Endo-genous," NBER Working Papers 3671, National Bureau of Economic Research, Inc.
  6. Markusen, James R., 2002. "Multinational Firms and the Theory of International Trade," MPRA Paper 8380, University Library of Munich, Germany.
  7. 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.
  8. Rauscher, Michael, 1994. "Environmental regulation and the location of polluting industries," Kiel Working Papers 639, Kiel Institute for the World Economy.
  9. James R. Markusen & Anthony J. Venables, 1995. "Multinational Firms and The New Trade Theory," NBER Working Papers 5036, National Bureau of Economic Research, Inc.
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