Inter-regional Competition, Comparative Advantage, and Environmental Federalism

Paul Missios (), Ida Ferrara and Halis Murat Yildiz ()

No 27, Working Papers from Ryerson University, Department of Economics

Abstract: In this paper, we compare endogenous environmental policy setting with centralized and decentralized governments when regions have comparative advantages in different polluting goods. We develop a two-region, two-good model with inter-regional environmental damages and perfect competition in product markets, where both regions produce both goods. Despite positive spillovers of pollution across regions, the model predicts that decentralization may lead to weaker or stricter environmental standards or taxes, depending on the degree of regional comparative advantage and the extent of transboundary pollution. This suggests that federalism can lead to either a "race to the bottom" or a "race to the top," without relying on inefficient lobbying efforts or capital competition.

Keywords: environmental policy; federalism; centralism; public economics (search for similar items in EconPapers)
JEL-codes: D10 H23 Q28 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cwa, nep-env, nep-geo and nep-ure
Date: 2011-01
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Persistent link: http://EconPapers.repec.org/RePEc:rye:wpaper:wp027

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