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Strategic Environmental Policy under Free Entry of Firms

Author

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  • Thorsten Bayındır‐Upmann
Abstract
With direct trade barriers banned, governments may be tempted to use indirect policy tools to interfere with trade, such as environmental taxes. The author uses a model of an endogenous market structure, where the number of firms is determined by a zero‐profit condition in one country but is exogenously given in the other country, to show that a government harboring a fixed number of firms fails to affect aggregate supply, and therefore has little scope for improving domestic environmental quality (if pollution is transboundary). Moreover, owing to the absence of a terms‐of‐trade effect, it diverts from the classical strategic tax rule. The author argues that both governments arguably fix their equilibrium emission taxes “too low,” meaning that tax competition plausibly leads to “ecological dumping.”

Suggested Citation

  • Thorsten Bayındır‐Upmann, 2003. "Strategic Environmental Policy under Free Entry of Firms," Review of International Economics, Wiley Blackwell, vol. 11(2), pages 379-396, May.
    • Handle: RePEc:bla:reviec:v:11:y:2003:i:2:p:379-396
    DOI: 10.1111/1467-9396.00389
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    References listed on IDEAS

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    Cited by:

    1. Phoebe Koundouri & Fabio Antoniou & Panos Hatzipanayotou, 2010. "Tradable Permits vs Ecological Dumping," DEOS Working Papers 1002, Athens University of Economics and Business.
    2. Requate, Till, 2005. "Environmental Policy under Imperfect Competition: A Survey," Economics Working Papers 2005-12, Christian-Albrechts-University of Kiel, Department of Economics.

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