Environmental Policy when Market Structure and Plant Locations are Endogenous, Issue 3671
National Bureau of Economic Research, 1991 - Environmental policy - 25 pages
A two-region, two-firm model is developed in which firms choose the number and the regional locations of their plants. Both firms pollute and, in this context, market structure is endogenous to environmental policy. There are increasing returns at the plant level, imperfect competition between the "home" and the "foreign" firm, and transport costs between the two markets. These features imply that at critical levels of environmental policy variables, small policy changes cause large discrete jumps in a region's pollution and welfare as a firm closes or opens a plant, or shifts production for the foreign region from/to the home-region plant to/from a foreign branch plant. The implications for optimal environmental policy differ significantly from those suggested by traditional Pigouvian marginal analysis.
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Alberto Alesina analysis based in Region Bureau of Economic consumer surplus Dani Rodrik decreasing disutility from pollution effects endogeneity of market environmental policy equation equilibrium framework equilibrium level equilibrium market structure equilibrium social welfare example games exporting firm operates given the number graph holding market structure imperfect competition impose a tax Imposing the optimal increasing returns individual in Region location and market LOCATIONS ARE ENDOGENOUS loss of consumer marginal cost maximizing maximum profits Nash Equilibrium NBER number of plants numerical analysis optimal exogenous optimal pollution tax parameter values partial equilibrium Pethig plant in Region Plants 1 Plant POLICY WHEN MARKET produce in Region reduction in pollution remain at 2,2 returns to scale s^soo sa^ea social welfare function specific fixed costs STRUCTURE AND PLANT structure will remain substitutes TAX IN REGION tax revenue two-stage game Unilateral Pollution Tax unit transport costs welfare in Region welfare level