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Think Globally, Cap Locally, and Trade Widely: Efficient Decentralized Policy Making in the Presence of Spillovers

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  • Joel R. Landry

Abstract

This paper shows that when decentralized governments atomistically compete in caps or mandates to address externalities or public goods that impose spillovers on others they may be able to achieve an efficient allocation. Competition in quantity instruments eliminates distortions that arise when spillover generating factors cross borders. If governments also allow free trade in virtual permits and on average consider the external benefits their policy choices impose on others, then efficiency can be restored. This occurs because an explicit price link between virtual and real markets induces governments to arbitrage away terms of trade distortions. This result is robust to any number and permutation of public goods, bads, and/or externalities, and thus specifies the precise conditions by which competition among decentralized governments to set the size of virtual markets can restore Pareto efficiency, even when markets are incomplete and spillovers cross government borders.

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  • Joel R. Landry, 2021. "Think Globally, Cap Locally, and Trade Widely: Efficient Decentralized Policy Making in the Presence of Spillovers," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 8(1), pages 91-124.
    • Handle: RePEc:ucp:jaerec:doi:10.1086/711375
    DOI: 10.1086/711375
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    Cited by:

    1. Landry, Joel R., 2021. "The political allocation of green pork and its implications for federal climate policy," Journal of Public Economics, Elsevier, vol. 201(C).
    2. Meya, Jasper N. & Neetzow, Paul, 2021. "Renewable energy policies in federal government systems," Energy Economics, Elsevier, vol. 101(C).
    3. Fabio Antoniou & Panos Hatzipanayotou & Nikos Tsakiris, 2021. "Strategic Export Motives and Linking Emission Markets," CESifo Working Paper Series 8847, CESifo.
    4. Nikos Tsakiris & Panos Hatzipanayotou & Michael S. Michael, 2022. "Tradable Emission Permits and Strategic Capital Taxation," University of Cyprus Working Papers in Economics 01-2022, University of Cyprus Department of Economics.
    5. Alan Randall, 2021. "Monitoring Sustainability and Targeting Interventions: Indicators, Planetary Boundaries, Benefits and Costs," Sustainability, MDPI, vol. 13(6), pages 1-19, March.

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