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The shadow cost of mobile public bads

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  • Tsao, Shu-Chen
  • Costello, Christopher

Abstract

We price the transboundary externality of mobile public bads such as diseases and invasive species. We focus on the marginal cost to country B of an increase in the stock (i.e. an “outbreak”) in country A. These cross-jurisdiction marginal costs depend not only on economic, ecological, and spatial features of both jurisdictions but also on jurisdictions’ strategic reactions to the outbreak. Using a spatial dynamic game, we calculate the “cross-jurisdiction shadow costs” of an outbreak of mobile public bad under the Markov-perfect Nash equilibrium of control efforts. We find that under reasonable conditions, the source country has private incentives to control the outbreak itself, which can lead to a situation where the cross-jurisdiction shadow cost is, in fact, zero. We also derive conditions where a country optimally fails to control the outbreak (for example, damages in that country are small), in which case cross-jurisdiction shadow costs are positive. Finally, we note that since cooperative control of the mobile public bad delivers substantially higher welfare than non-cooperative control, we derive an externality pricing instrument that perfectly internalizes the externality and induces cooperative control among all countries.

Suggested Citation

  • Tsao, Shu-Chen & Costello, Christopher, 2024. "The shadow cost of mobile public bads," Journal of Environmental Economics and Management, Elsevier, vol. 127(C).
  • Handle: RePEc:eee:jeeman:v:127:y:2024:i:c:s0095069624000913
    DOI: 10.1016/j.jeem.2024.103017
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    More about this item

    Keywords

    Mobile public bad; Transboundary externality; Spatial dynamic game; Shadow cost;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q20 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - General

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