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    Efficient Environmental Standards with Imperfect Competition

    191405_81678_20130301Petchey.pdf (361.3Kb)
    Access Status
    Open access
    Authors
    Petchey, Jeffrey
    Date
    2013
    Type
    Working Paper
    
    Metadata
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    Citation
    Petchey, Jeffrey D. 2013. Efficient Environmental Standards with Imperfect Competition, Centre for Research in Applied Economics (CRAE) Working Paper Series, Series in Public Economics, Curtin University, Curtin Business School and the School of Economics and Finance.
    URI
    http://hdl.handle.net/20.500.11937/11533
    Collection
    • Curtin Research Publications
    Abstract

    Economists have been concerned that sovereign communities may distort environmental policies to attract mobile capital. This paper provides something of a challenge to this idea. It does so by extending the model of Oates and Schwab (1988) to allow the supply of capital to a state, whether acting independently or strategically as part of a federation, to be less than perfectly elastic due to capital market imperfections. This gives the state an incentive to distort its policies in order to manipulate its domestic capital price relative to the given world return for capital. The key result is to show that the state always prefers to use a dedicated capital tax to achieve its desired domestic price, leaving environmental standards at efficient levels. Only when the state is denied access to a capital tax will it resort to distorting environmental standards. Thus, distortions to environmental standards arise from restrictions on the set of policy instruments rather than non-cooperative behavior or capital mobility per se, at least when the incentive to distort policy arises from capital market imperfections.

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