Environmental Policy When Market Structure and Plant Locations are Endo-Genous
James R. Markusen
University of Colorado at Boulder - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)
Edward R. Morey
University of Colorado at Boulder - Department of Economics; National Bureau of Economic Research (NBER)
Simon Fraser University (SFU) - Department of Economics
NBER Working Paper No. w3671
A two-region, two-firm model is developed in which firms choose the number and the regional locations of their plants. Both firms pollute and, in this context, market structure is endogenous to environmental policy. There are increasing returns at the plant level, imperfect competition between the "home" and the "foreign" firm, and transport costs between the two markets. These features imply that at critical levels of environmental policy variables, small policy changes cause large discrete jumps in a region's pollution and welfare as a firm closes or opens a plant, or shifts production for the foreign region from/to the home-region plant to/from a foreign branch plant. The implications for optimal environmental policy differ significantly from those suggested by traditional Pigouvian marginal analysis.
Number of Pages in PDF File: 33working papers series
Date posted: July 19, 2010
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