NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Environmental Policy When Market Structure and Plant Locations are Endo-genous

James R. Markusen, Edward R. Morey, Nancy Olewiler

NBER Working Paper No. 3671
Issued in April 1991
NBER Program(s):   ITI   IFM

A two-region, two-firm model is developed in which firms choose the number and the regional locations of their plants. Both firms pollute and, in this context, market structure is endogenous to environmental policy. There are increasing returns at the plant level, imperfect competition between the "home" and the "foreign" firm, and transport costs between the two markets. These features imply that at critical levels of environmental policy variables, small policy changes cause large discrete jumps in a region's pollution and welfare as a firm closes or opens a plant, or shifts production for the foreign region from/to the home-region plant to/from a foreign branch plant. The implications for optimal environmental policy differ significantly from those suggested by traditional Pigouvian marginal analysis.

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Document Object Identifier (DOI): 10.3386/w3671

Published: Journal of Environmental Economics and Management, vol. 24, 1993, p. 69-86 citation courtesy of

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