Noncooperative Equilibria in Regional Environmental Policies When Plant Locations are Endogenous

33 Pages Posted: 19 Jun 2004 Last revised: 29 Jul 2010

See all articles by James R. Markusen

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)

Nancy Olewiler

Simon Fraser University (SFU) - Department of Economics

Date Written: April 1992

Abstract

A two-region model is presented in which an imperfectly competitive firm produces a good with increasing returns at the plant level, and in which shipping costs exist between the two markets. Production of the good causes local pollution, and regional governments can levy pollution taxes or impose environmental regulations. The firm decides. partly on the basis of these environmental policy variables, whether to maintain plants in both regions, serve both regions from a single plant or shut down. A non-cooperative equilibrium in regional environmental policies occurs when each region is choosing the environmental policy that maximizes its welfare given the environmental policy in the other region. Two types of harmful tax (regulatory) competitions are documented. If the disutility of pollution is high enough, each region will only want the polluting good produced in the other region and the two regions will likely compete by increasing their environmental taxes (standards) until the polluting firm is driven from the market. This is the case of "Not in my backyard". Alternatively, if the disutility from pollution is not as great, each region will realize that their welfare could decrease if their environmental policy causes the firm to not operate in their region. In this case, the regions will usually compete by undercutting each others pollution tax rates (environmental standards).

Suggested Citation

Markusen, James R. and Morey, Edward R. and Olewiler, Nancy, Noncooperative Equilibria in Regional Environmental Policies When Plant Locations are Endogenous (April 1992). NBER Working Paper No. w4051. Available at SSRN: https://ssrn.com/abstract=226879

James R. Markusen (Contact Author)

University of Colorado at Boulder - Department of Economics ( email )

Campus Box 256
Boulder, CO 80309
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Centre for Economic Policy Research (CEPR)

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National Bureau of Economic Research (NBER) ( email )

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Edward R. Morey

University of Colorado at Boulder - Department of Economics ( email )

Campus Box 256
Boulder, CO 80309
United States
303-492-6898 (Phone)
303-492-8960 (Fax)

HOME PAGE: http://www.colorado.edu/Economics/morey/index.htm

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

Nancy Olewiler

Simon Fraser University (SFU) - Department of Economics ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada
(604) 291-3442 (Phone)

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