Ecological Dumping under Monopolistic Competition

Abstract

The competitive choice of emission taxes by two governments is analysed in a model of monopolostic competition with capital mobility where pollution externalities are regional. Assuming that governments have no other policy instrument apart from emission taxes at their disposal, I show that governments choose inefficiently low (high) taxes if the importance of emissions in production is small (large) relative to transport costs and the mark-up. In contrast to the previous literature, the marginal disutility of pollution is not among the parameters which separate the non-cooperative choice of emission taxes from the social planner's choice.