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A Tale of Two Externalities: Environmental Policy and Market Structure

  • Ana Espinola-Arredondo
  • Felix Munoz-Garcia

    ()

    (School of Economic Sciences, Washington State University)

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.

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File URL: http://faculty.ses.wsu.edu/WorkingPapers/Munoz/WP2009_19.pdf
File Function: First version, 2009
Download Restriction: no

Paper provided by School of Economic Sciences, Washington State University in its series Working Papers with number 2009-19.

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Length: 31 pages
Date of creation: May 2010
Date of revision:
Handle: RePEc:wsu:wpaper:munoz-5
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