Petchey's (2015) Extension of Oates & Schwab's (1988) Efficiency Result Revisited

Thomas Eichner and Rüdiger Pethig

No 6315, CESifo Working Paper Series from CESifo

Abstract: Oates and Schwab (1988) consider an economy with mobil capital and jurisdictions that suffer from local pollution. They show that welfare-maximizing jurisdictions implement the first-best, if they take prices as given and have at their disposal a capital tax and an environmental standard. Petchey (2015) claims that the efficiency result of Oates and Schwab can be extended to a large price-influencing jurisdiction. In the present note we show that the concept of Pareto efficiency cannot be applied in Petchey’s model. Next, we expand his model by a second jurisdiction and prove that Petchey’s claim is false, i.e. we show that the allocation implemented by a large price-influencing jurisdiction that sets an environmental standard and a capital tax fails to be (Pareto) efficient.

Keywords: pollution; environmental standards; mobile capital; taxes (search for similar items in EconPapers)
JEL-codes: H23 H71 (search for similar items in EconPapers)
Date: 2017
New Economics Papers: this item is included in nep-ene and nep-env
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