Can Cross-Border Pollution Reduce Pollution?
14 Pages Posted: 30 Dec 2002
We develop a two-country model of foreign aid and cross-border pollution resulting from production activities in the recipient country. There is both private and public abatement of pollution, the latter being financed through emissions tax revenue and foreign aid. We characterize a Nash equilibrium in which the donor country chooses the amount of aid and the recipient chooses the fraction of aid allocated to pollution abatement and the emission tax rate. At this equilibrium, an increase in the donor's perceived rate of cross-border pollution reduces emission levels.
JEL Classification: Q28, F35, H41
Suggested Citation: Suggested Citation