A BEJEAP Topics article.

Abstract

Stringent environmental taxes in high-income countries are assumed to drive dirty industries to low-income countries, but the empirical evidence for ``pollution havens" is surprisingly weak. We demonstrate that a government trying to prevent flight by a ``dirty" durable good monopolist can impose an effluent tax that is offset by a lump-sum subsidy so that both firm profits and host-country welfare are increased. The scheme exploits the Coase Conjecture insight: a durable goods monopolist has a time-consistency dilemma that limits its ability to restrict future output. In this environment the effluent tax provides a credible commitment that restricts future supply. We assert that the use of lump-sum subsidies in strategic location competition is consistent with this mechanism, and this paradigm may be an important piece of the ``pollution haven paradox."

Submitted: March 23, 2005 · Accepted: June 14, 2007 · Published: July 2, 2007

Recommended Citation

Driskill, Robert and Horowitz, Andrew W. (2007) "The Pollution Haven Paradox: Can an Effluent Tax Improve both Profits and Welfare?," The B.E. Journal of Economic Analysis & Policy: Vol. 7 : Iss. 1 (Topics), Article 30.
Available at: http://www.bepress.com/bejeap/vol7/iss1/art30