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Optimal Tax Policies under Two-Stage Clean-Up, Cross-Border Pollution and Capital Mobility


  • Costas Hadjiyiannis
  • Panos Hatzipanayotou
  • Michael S. Michael


The literature has identified cross-border pollution, capital mobility and two-stage clean-up as the key features in the «trade Vs environment» debate, yet no study examines all three simultaneously. We build a two country trading block model with cross-border pollution and free movements of goods and capital between the two countries. Pollution reduces welfare and there is simultaneous private and public pollution abatement. Public pollution abatement is financed with the use of lump-sum and pollution tax revenue. We, also, examine how cross-border pollution and capital mobility affect each country’s optimal tax policies. Finally, we examine how the existence of capital mobility alters the effectiveness of pollution taxes on net pollution.

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  • Costas Hadjiyiannis & Panos Hatzipanayotou & Michael S. Michael, 2002. "Optimal Tax Policies under Two-Stage Clean-Up, Cross-Border Pollution and Capital Mobility," University of Cyprus Working Papers in Economics 0204, University of Cyprus Department of Economics.
  • Handle: RePEc:ucy:cypeua:0204

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    Optimal Taxes; Two-stage Clean-Up. Cross-Border Pollution; Capital Mobility.;

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