Working paper

Environmental Tax Competition and Welfare: The Good News about Lobbies

Philippe Bontems, Guillaume Cheikbossian, and Houda Hafidi

Abstract

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.

Keywords

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

JEL codes

  • 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

Replaced by

Philippe Bontems, Guillaume Cheikbossian, and Houda Hafidi, Environmental Tax Competition and Welfare: The Good News about Lobbies, Social Choice and Welfare, 2024, forthcoming.

Reference

Philippe Bontems, Guillaume Cheikbossian, and Houda Hafidi, Environmental Tax Competition and Welfare: The Good News about Lobbies, TSE Working Paper, n. 24-1551, July 2024.

See also

Published in

TSE Working Paper, n. 24-1551, July 2024