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Can decentralized planning really achieve first-best in the presence of environmental spillovers?

Harrison Fell () and Daniel Kaffine

Journal of Environmental Economics and Management, 2014, vol. 68, issue 1, 46-53

Abstract: It is generally accepted that decentralized policy choice in the presence of interjurisdictional spillovers is inefficient. Strikingly, Ogawa and Wildasin (2009) find that in a model with heterogenous jurisdictions, interjurisdictional capital flows, and interjurisdictional environmental damage spillovers, decentralized planning outcomes are equivalent to that under a centralized planner. We first show the critical importance of two key assumptions (no retirement of capital, fixed environmental damages per unit of capital) in obtaining this result. Second, we consider a more general model allowing for capital retirement and abatement activities and show that the outcome of a decentralized market generally differs from the solution of a centralized planner׳s social welfare-maximizing problem.

Keywords: Fiscal federalism; Environmental spillovers; Abatement; Environmental policy (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeeman:v:68:y:2014:i:1:p:46-53

DOI: 10.1016/j.jeem.2014.04.001

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Journal of Environmental Economics and Management is currently edited by M.A. Cole, A. Lange, D.J. Phaneuf, D. Popp, M.J. Roberts, M.D. Smith, C. Timmins, Q. Weninger and A.J. Yates

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