Environmental standards in a large open economy revisited

Thomas Eichner () and Rüdiger Pethig
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Thomas Eichner: University of Hagen

Letters in Spatial and Resource Sciences, 2018, vol. 11, issue 2, No 5, 157-166

Abstract: Abstract Oates and Schwab (J Public Econ 35:333–354, 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 (J Public Econ Theory 17:461–467, 2015) claims that the efficiency result of Oates and Schwab can be extended to a large price-influencing jurisdiction. To enable efficiency comparisons, we expand his model by a second jurisdiction with price-elastic excess supply of capital and prove that his large price-influencing jurisdiction sets an environmental standard and a capital tax that fail to be (Pareto) efficient. Thereby we clarify that and why the allocation of emissions is inefficient, in general, although the allocation rule for emissions is not.

Keywords: Pollution; Environmental standards; Mobile capital; Taxes (search for similar items in EconPapers)
JEL-codes: H23 H71 (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1007/s12076-018-0207-4

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