Public Pollution Abatement, Regional Capital Mobility, and Tax Competition

Abstract

The environmental economics literature has ignored the effects of the interaction among capital mobility, private and public pollution abatement, and cross‐border pollution on environmental policies. We analyze these effects in the context of a general equilibrium model. We find, among other things, that (i) when countries are symmetric, the presence of public pollution abatement makes Nash equilibrium pollution taxes efficient while lump‐sum taxes remain inefficient; and (ii) when countries are asymmetric, both taxes are inefficient and the Nash equilibrium pollution taxes depend mainly on the direction of capital mobility, factor intensity, and the degree of cross‐border pollution. These results indicate that policy cooperation is more important when countries are different.