Environmental Tax Competition and Welfare: The Good News about Lobbies

Résumé

This paper focuses on the welfare effects of domestic and international lobbying in the context of two countries linked by both trade and pollution. We consider a reciprocal-markets model where, in each country, a domestic firm produces a polluting good, that can result in a cross-national environmental externality, and competes in quantities in each market with a foreign firm. Each government independently sets a pollution tax under political pressure from green and industrial lobbies `a la Grossman and Helpman (1994). Our results mainly show that political pressure from domestic and/or international lobbies can help mitigate tax competition between the two countries, resulting in an improvement in social welfare. In fact, lobbying acts much like a strategic delegation device by changing the social welfare weights in the objective function of each government. The (potential) welfare-improving effect of political pressure depends on the relative strengths of the lobbies and on the nature of the strategic interactions in taxes.

Mots-clés

Lobbying; transboundary pollution; international trade; international politics; environmental tax;

Codes JEL

D72: Political Processes: Rent-Seeking, Lobbying, Elections, Legislatures, and Voting Behavior
F12: Models of Trade with Imperfect Competition and Scale Economies • Fragmentation
F18: Trade and Environment
Q58: Government Policy