Can household mobility solve basic environmental problems?

The paper studies the role of household mobility for efficiency of decentralized environmental policy. Pollutants may travel across regional boundaries, and regions can influence their capital income from abroad as well as the rent outflow to nonresidents by means of their environmental policy. Different degrees of interregional household mobility are analyzed within this framework. While regional governments internalize all externalities in their own self-interest in the case of perfect household mobility, only a region that voluntarily makes an interregional transfer to the other region has incentives to internalize interregional externalities if households are imperfectly mobile.