TY  - JOUR
AU  - Banzhaf,H. Spencer
AU  - Chupp,B. Andrew
TI  - Heterogeneous Harm vs. Spatial Spillovers: Environmental Federalism and US Air Pollution
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 15666
PY  - 2010
Y2  - January 2010
UR  - http://www.nber.org/papers/w15666
L1  - http://www.nber.org/papers/w15666.pdf
N1  - Author contact info:
H. Spencer Banzhaf
Department of Economics
Andrew Young School of Policy Studies
Georgia State University
P.O. Box 3992
Atlanta, GA 30302
Tel: 404/413-0252
Fax: 404/413-0248
E-Mail: hsbanzhaf@gsu.edu

B. Andrew Chupp
Dept. of Economics
Campus Box 4200
Normal, IL 61790-4200
E-Mail: bchupp@ilstu.edu
AB  - The economics of environmental federalism identifies two book-end departures from the first-best, which equates marginal costs and benefits in all local jurisdictions.  Local governments may respond to local conditions, but ignore inter-jurisdictional spillovers.  Alternatively, central governments may internalize spillovers, but impose uniform regulations ignoring local hetero-geneity.  We provide a simple model that demonstrates that the choice of policy depends crucial-ly on the shape of marginal abatement costs.  If marginal costs are increasing and convex, then abatement cost elasticities will tend to be higher around the local policies.  This increases the deadweight loss of those policies relative to the centralized policy, ceteris paribus.

Using a large simulation model, we then empirically explore the tradeoffs between local versus second-best uniform policies for US air pollution.  We find that US states acting in their own interest lose about 31.5% of the potential first-best benefits, whereas the second-best uniform policy loses only 0.2% of benefits.  The centralized policy outperforms the state policy for two reasons.  First, inter-state spillovers are simply more important that inter-state hetero-geneity in this application.  Second, welfare losses are especially small under the uniform policy because elasticities are much higher over the relevant range of the cost functions.
ER  -