Environmental Tax Competition and Welfare: The Good News about Lobbies

Philippe Bontems, Guillaume Cheikbossian and Houda Hafidi

No 24-1551, TSE Working Papers from Toulouse School of Economics (TSE)

Abstract: This paper focuses on the welfare effects of domestic and international lobbying in the context of two countries linked by both trade and pollution. We consider a reciprocal-markets model where, in each country, a domestic firm produces a polluting good, that can result in a cross-national environmental externality, and competes in quantities in each market with a foreign firm. Each government independently sets a pollution tax under political pressure from green and industrial lobbies `a la Grossman and Helpman (1994). Our results mainly show that political pressure from domestic and/or international lobbies can help mitigate tax competition between the two countries, resulting in an improvement in social welfare. In fact, lobbying acts much like a strategic delegation device by changing the social welfare weights in the objective function of each government. The (potential) welfare-improving effect of political pressure depends on the relative strengths of the lobbies and on the nature of the strategic interactions in taxes.

Keywords: Lobbying; transboundary pollution; international trade; international politics; environmental tax (search for similar items in EconPapers)
JEL-codes: D72 F12 F18 Q58 (search for similar items in EconPapers)
Date: 2024-07
New Economics Papers: this item is included in nep-ene, nep-env, nep-gth, nep-int, nep-pol and nep-pub
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Persistent link: https://EconPapers.repec.org/RePEc:tse:wpaper:129516

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