A Tale of Two Externalities: Environmental Policy and Market Structure

30 Pages Posted: 1 Feb 2010

See all articles by Ana Espinola-Arredondo

Ana Espinola-Arredondo

Washington State University - School of Economic Sciences

Felix Munoz-Garcia

Washington State University - School of Economic Sciences

Date Written: December 15, 2009

Abstract

This paper examines the two externalities that a country's environmental regulation imposes on other country's welfare: an environmental externality, due to transboundary pollution, and, a competitive advantage externality, as regulations affect domestic firms' abatement costs, which impact the profits of their foreign competitors. We first analyze the emission standards that countries independently set under different market structures and then compare them with the standards set under international environmental agreements that internalize one or both types of externalities. The paper hence disentangles the effect of each externality. We show that firms' profits increase when countries participate in international treaties if the environmental damage from pollution is relatively low and such pollution is not significantly transboundary. We hence demonstrate that international environmental agreements can serve as cooperative devices firms use to ameliorate overproduction and increase profits, without the need to form collusive agreements.

Keywords: Transboundary pollution, strategic environmental policy, international environmental agreement, market structure

JEL Classification: C72, F12 , H23, Q2

Suggested Citation

Espinola-Arredondo, Ana and Munoz-Garcia, Felix, A Tale of Two Externalities: Environmental Policy and Market Structure (December 15, 2009). Available at SSRN: https://ssrn.com/abstract=1544611 or http://dx.doi.org/10.2139/ssrn.1544611

Ana Espinola-Arredondo (Contact Author)

Washington State University - School of Economic Sciences ( email )

111C Hulbert Hall, Pullman, WA 99164
Pullman, WA 99164-4741
United States
509-335-8494 (Phone)

HOME PAGE: http://www.ses.wsu.edu/People/espinola.htm

Felix Munoz-Garcia

Washington State University - School of Economic Sciences ( email )

P.O. Box 646210
Hulbert Hall 101
Pullman, WA 99164-6210
United States

HOME PAGE: http://www.ses.wsu.edu/People/munoz.htm

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