Endogenous Environmental Policy when Pollution is Transboundary

Joachim Fünfgelt () and Günther Schulze

No 196, Working Paper Series in Economics from University of Lüneburg, Institute of Economics

Abstract: We analyze the formation of environmental policy to regulate transboundary pollution if governments are self-interested. In a common agency framework, we portray the environmental policy calculus of two political supportmaximizing governments that are in a situation of strategic interaction with respect to their environmental policies, but too small to affect world market prices. We show how governments systematically deviate from socially optimal environmental policies. Taxes may be too high if environmental interests and pollution-intensity of production are very strong; under different constellations they may be too low. Governments may actually subsidize the production of a polluting good. Politically motivated environmental policy thus may be more harmful to the environment as compared to the benevolent dictators’ solution. In other cases it may enhance environmental quality and welfare beyond what a benevolent government would achieve.

Keywords: Political economy; environmental policy; transboundary pollution; common agency; strategic interaction (search for similar items in EconPapers)
JEL-codes: F5 Q58 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2011-02
New Economics Papers: this item is included in nep-ene, nep-env, nep-pol and nep-reg
References: View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Working Paper: Endogenous Environmental Policy when Pollution is Transboundary (2011)
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