Can Small Economies Act Strategically? The Case of Consumption Pollution and Non-tradable Goods

Michael Michael, Panos Hatzipanayotou and Nikos Tsakiris ()

No 2312, DEOS Working Papers from Athens University of Economics and Business

Abstract: We develop a model of two small open asymmetric economies with two tradable and one non-tradable goods, capital mobility and consumption generated cross border pollution. We show that the Nash equilibrium calls for a consumption tax and capital tax (subsidy) when the consumption of the tradable (non-tradable) good pollutes. In this model, the consumption tax causes pollution leakages between the two countries which is partly offset by the capital tax or subsidy. Thus, the existence of non-tradable goods and international capital mobility induce the small countries to act strategically. In the absence of capital taxes, consumption taxes are lower to their rates when capital taxes are also present since are used strategically to mitigate the pollution leakage.

Keywords: Pollution Leakage; Non-tradable Goods; Capital Mobility; Capital and Consumption Taxes; Consumption-generated Cross-border Pollution (search for similar items in EconPapers)
JEL-codes: F15 F18 F20 H20 (search for similar items in EconPapers)
Date: 2023-05-08
New Economics Papers: this item is included in nep-env, nep-gth, nep-int and nep-opm
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Working Paper: Can small economies act strategically? The case of consumption pollution and non-tradable goods (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:aue:wpaper:2312

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