Endogenous Environmental Policy When Pollution is Transboundary

University of Lüneburg Working Paper No. 196

University of Freiburg Department of International Economic Policy Discussion Paper No. 14

37 Pages Posted: 20 Mar 2012

See all articles by Joachim Fünfgelt

Joachim Fünfgelt

Leuphana University of Lüneburg - Dept. of Sustainability Sciences and Dept. of Economics

Gunther G. Schulze

University of Freiburg - Department of Economics

Date Written: February 2, 2011

Abstract

We analyze the formation of environmental policy to regulate transboundary pollution if governments are self-interested. In a common agency framework, we portray the environmental policy calculus of two political support-maximizing governments that are in a situation of strategic interaction with respect to their environmental policies, but too small to affect world market prices. We show how governments systematically deviate from socially optimal environmental policies. Taxes may be too high if environmental interests and pollution - intensity of production are very strong; under different constellations they may be too low. Governments may actually subsidize the production of a polluting good. Politically motivated environmental policy thus may be more harmful to the environment as compared to the benevolent dictators’ solution. In other cases it may enhance environmental quality and welfare beyond what a benevolent government would achieve.

Keywords: political economy, environmental policy, transboundary pollution, common agency, strategic interaction

JEL Classification: Q58, F5

Suggested Citation

Fünfgelt, Joachim and Schulze, Gunther G., Endogenous Environmental Policy When Pollution is Transboundary (February 2, 2011). University of Lüneburg Working Paper No. 196 , University of Freiburg Department of International Economic Policy Discussion Paper No. 14 , Available at SSRN: https://ssrn.com/abstract=1793944 or http://dx.doi.org/10.2139/ssrn.1793944

Joachim Fünfgelt (Contact Author)

Leuphana University of Lüneburg - Dept. of Sustainability Sciences and Dept. of Economics ( email )

Scharnhorststrasse 1
Lüneburg, 21314
Germany

HOME PAGE: http://www.leuphana.de/insugo

Gunther G. Schulze

University of Freiburg - Department of Economics ( email )

Platz der Alten Synagoge
D-79085 Freiburg
Germany

HOME PAGE: http://www.vwl.uni-freiburg.de/fakultaet/sopo/index.html

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