Locational Competition under Environmental Regulation when Input Prices and Productivity Differ

Conrad, Klaus

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URL: https://ub-madoc.bib.uni-mannheim.de/1014
URN: urn:nbn:de:bsz:180-madoc-10141
Document Type: Working paper
Year of publication: 2001
The title of a journal, publication series: Discussion Papers / Institut für Volkswirtschaftslehre und Statistik
Volume: 597
Place of publication: Mannheim
Publication language: English
Institution: School of Law and Economics > Sonstige - Fakultät für Rechtswissenschaft und Volkswirtschaftslehre
MADOC publication series: Institut für Volkswirtschaftslehre und Statistik > Discussion Papers
Subject: 330 Economics
Subject headings (SWD): Wettbewerb , Steuer , Regierung
Abstract: The purpose of the paper is to outline an analytical framework which captures the ample scope of locational competition: cost differences, resulting from differences in factor prices including taxes, human capital, infrastructure services and total factor productivity. If cost differences are small, locational competition controls excessive government power. We have modeled locational competition by assuming that governments have a vital interest to keep mobile factors of production at home. We represent this aspect by restricting the usage of environmental instruments such that they will at most exhaust the cost difference to a competing foreign firm. If cost differences are large enough there is no binding restriction for the cost-benefit calculus of a national environmental policy. The tax will be below marginal damage due to strategic reasons of rent shifting. If small international cost differences do not allow taxation in accordance with marginal damage considerations, then locational competition restricts the size of the tax rate such that the firm is indifferent in relocating or staying at home. If no cost differences exist, it is even possible that both governments will subsidize the pollution intensive input in order to make the domestic location attractive.
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