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A Tale of Two Externalities: Environmental Policy and Market Structure

Author

Listed:
  • Ana Espinola-Arredondo
  • Felix Munoz-Garcia

    () (School of Economic Sciences, Washington State University)

Abstract

This paper examines the two externalities that a country's environmental regulation imposes on other country's welfare: an environmental externality, due to transboundary pollution, and a competitive advantage externality, as regulations affect domestic firms' abatement costs, which impact the profits of their foreign competitors. We first analyze the emission standards that countries independently set under different market structures and then compare them with the standards set under international environmental agreements that internalize one or both types of externalities. The paper hence disentangles the effect of each externality. We show that firms’ profits increase when countries participate in international treaties if the environmental damage from pollution is relatively low and such pollution is not significantly transboundary. We hence demonstrate that international environmental agreements can serve as cooperative devices firms use to ameliorate overproduction and increase profits, without the need to form collusive agreements.

Suggested Citation

  • Ana Espinola-Arredondo & Felix Munoz-Garcia, 2010. "A Tale of Two Externalities: Environmental Policy and Market Structure," Working Papers 2009-19, School of Economic Sciences, Washington State University.
  • Handle: RePEc:wsu:wpaper:munoz-5
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    File URL: http://faculty.ses.wsu.edu/WorkingPapers/Munoz/WP2009_19.pdf
    File Function: First version, 2009
    Download Restriction: no

    More about this item

    Keywords

    Transboundary pollution; strategic environmental policy; international environmental agreement; market structure;

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy

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