Environmental tax competition and welfare: the good news about lobbies

Philippe Bontems (), Guillaume Cheikbossian and Houda Hafidi
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Philippe Bontems: INRAE, University of Toulouse Capitole
Guillaume Cheikbossian: CEE-M (Université de Montpellier, CNRS, INRAE, Institut Agro.)
Houda Hafidi: Aix Marseille Univ

Social Choice and Welfare, 2025, vol. 65, issue 1, No 2, 27-68

Abstract: 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 à la Grossman and Helpman (Am Econ Rev 84(4):833–850, 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.

Date: 2025
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DOI: 10.1007/s00355-024-01565-8

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