Petchey's (2015) Extension of Oates & Schwab's (1988) Efficiency Result Revisited

12 Pages Posted: 21 Feb 2017

See all articles by Thomas Eichner

Thomas Eichner

University of Siegen - School of Economic Disciplines

Rudiger Pethig

University of Siegen - School of Economic Disciplines; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: February 07, 2017

Abstract

Oates and Schwab (1988) consider an economy with mobile capital and jurisdictions that suffer from local pollution. They show that welfare-maximizing jurisdictions implement the first-best, if they take prices as given and have at their disposal a capital tax and an environmental standard. Petchey (2015) claims that the efficiency result of Oates and Schwab can be extended to a large price-influencing jurisdiction. In the present note we show that the concept of Pareto efficiency cannot be applied in Petchey’s model. Next, we expand his model by a second jurisdiction and prove that Petchey’s claim is false, i.e. we show that the allocation implemented by a large price-influencing jurisdiction that sets an environmental standard and a capital tax fails to be (Pareto) efficient.

Keywords: pollution, environmental standards, mobile capital, taxes

JEL Classification: H230, H710

Suggested Citation

Eichner, Thomas and Pethig, Rudiger, Petchey's (2015) Extension of Oates & Schwab's (1988) Efficiency Result Revisited (February 07, 2017). CESifo Working Paper Series No. 6315. Available at SSRN: https://ssrn.com/abstract=2921077

Thomas Eichner

University of Siegen - School of Economic Disciplines ( email )

Hoelderlinstrasse 3
57068 Siegen
Germany

Rudiger Pethig (Contact Author)

University of Siegen - School of Economic Disciplines ( email )

Hoelderlinstrasse 3
57068 Siegen
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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