If pollution emissions enter a constant returns to scale production function, the additional output generated by this unpaid factor cannot be an equilibrium phenomenon. Private factors will engage in rent seeking without some form of rationing. Herein, we propose a shared rationing mechanism and investigate the efficiency implications in a setting of devolved decision making. General equilibrium derived optimal conditions show that taxing capital alone will not provide the revenue for efficient local public good levels. Suboptimal public goods provision then leads to inefficient environmental quality. Interestingly, larger shares of emission rents rationed to mobile capital result in environmental competition becoming more fierce. Conversely, when large shares of rent are captured by locally owned fixed-factors, competition for mobile capital is subdued.
Efficient Decentralized Environmental Standards from a Model of Strategic Interjurisdictional Competition (Published)
The purpose of this paper is to develop a strategic model of interjurisdictional competition where regions choose taxes on two types of capital (locally and absentee owned) and set a level of local environmental quality. Regional strategic interactions are introduced to reinforce the differential returns to and tax treatment of capital types. Moreover, the choice of the level of environmental quality by a jurisdiction is allowed to effect the returns to mobile capital types. The joint determination and fiscal interaction of these three policy variables leads to efficiency in the devolved game. Taxation of mobile capital will not distort the choice of environmental standards when public goods are provided efficiently. Efficiency in public goods provision is accomplished with capital tax exporting.