Environment,Directed Technical Change and Economic Policy

We study the effects of an economic policy in an endogenous growth general equilibrium framework where production of consumption goods requires two resource inputs: a polluting non-renewable resource and a non-polluting labour resource. The use of the former contributes to the accumulation of pollution in the atmosphere, which affects welfare. There is a specific research sector associated with each of those resources. We provide a full welfare analysis, and we describe the equilibrium paths in a decentralized economy. We go on to study the effects of three associated economic policy tools: a tax on the polluting resource, and two research subsidies. We show that the optimal environmental policy has two main effects; it delays the extraction of the resource and with it the level of polluting emissions and it reallocates research efforts, decreasing the amount put into “grey” research to the benefit of “green” research. We also show that the environmental policy is grey-biased in the short-term, and green-biased in the long-term. Finally, we compute the optimal values for these tools.      

Global environment and dynamic games of environmental policy in an international duopoly

This paper examines a differential game model of international pollution control in which polluting oligopolists compete in a third country market. Two alternative policy instruments (emission taxes and command-and-control regulations) are considered. A tougher emission policy in the home country enhances the foreign firm’s competitiveness because of the static “rent-shifting” effect. The foreign country also enjoys a future improvement of the global environmental quality by “free riding” on the home country’s emission reduction effort. Because of these strategic effects, the levels of environmental policy determined in the noncooperative policy game are distorted away from the socially optimal level. Moreover, the emission tax game produces a more distortionary outcome than that in the command-and-control game; it generates more pollution and lower welfare.      

Economics of externalities and public policy

In this paper we study a particular case of “multiple” externalities associated to the production of a good/activity, whose external effects can change from positive to negative depending on the level of output (intersecting externalities). To analyze their impact on the public policy we propose a very simple two-agent partial equilibrium model in the technological context of externalities. In a static framework, the centralized solution always implies an optimal policy, which may consist of taxation or subsidization depending on the individual optimum and on the technology parameters. In a dynamic model with local knowledge of the efficiency function and instantaneous output adjustments, such an optimal policy can be structurally stable or unstable. In the latter case, under small changes of the parameters the policy may switch from low taxation/subsidization to high taxation/subsidization or vice versa, or even jump discontinuously from taxation to subsidization or vice versa. Furthermore, the decentralized solution based upon “tradable rights” can be economically equivalent to the centralized solution in the form of taxation policy but the two solutions may be not politically equivalent.

Economic Growth and (Re-)Distributive Policies in a Non-cooperative World

Many models show that redistribution is bad for growth. This paper argues that in a non-cooperative world optimizing, redistributing (“left-wing”) governments mimic non-redistributing (“right-wing”) policies for fear of capital loss if capital markets become highly integrated and the countries are technologically similar. “Left-right” competition leads to more redistribution and lower GDP growth than “left-left” competition. Efficiency differences allow for higher GDP growth and more redistribution than one's opponent. Irrespective of efficiency differences, however, “left-wing” governments have higher GDP growth when competing with other “left-wing” governments. The results may explain why one observes a positive correlation between redistribution and growth across countries, and why capital inflows and current account deficits may be good for relatively high growth.     

What is the Best Distribution for Pollution Abatement Efforts? Information for Optimizing the WFD Programs of Measures

The Water Framework Directive (WFD) has mobilized economic theory in order to encourage E.U. Member States to reach desirable environmental water pollution levels by conciliating economic and ecological interests. For this purpose, a stringent standard (“good status”) has been set. Nevertheless, it will be possible to relax this standard if it appears that total abatement costs required for reaching this “good status” exceed expected environmental benefits. This ambitious policy updates the issue of the abatement costs and environmental benefits assessment. Concerning the costs, a full discrimination of the abatement effort minimizes the total cost when the impact of polluters changes spatially, while a uniform effort can reach a pollution target in flexible ways. In this case, the increase of the degree of discrimination of the abatement effort is required only if it generates significant positive economies. Our theoretical and empirical results have shown that the discrimination advantage becomes insignificant for either very demanding or very little demanding ecological standards and varies according to the polluters’ profile. In the case of “intermediate” standards, efficiency gains become negligible with a restricted number of effort “levels”.     

International Trade and the Environment: Theoretical and Policy Linkages

I review and extend three approaches to trade and environmental policies: competitive general equilibrium, oligopoly and monopolistic competition. The first two have surprisingly similar implications: deviations from first-best rules are justified only by constraints on policy choice (which motivates what I call a “single dividend” approach to environmental policy), and taxes and emissions standards differ in ways which reflect the Le Chatelier principle. I also show how environmental taxes may lead to a catastrophic relocation of industry in the presence of agglomeration effects, although not necessarily if there is a continuum of industries which differ in pollution intensity. *An earlier version was presented as an invited plenary lecture to the European Association for Environmental and Resource Economics Conference, Oslo, 1999.     

Endogenous structural change and crisis in a multiple time-scales growth model

The slow and endogenous twist of economic macro-structure makes up an important evolutionary feature of capitalist economies, and may be at the root of structural crisis. In this line, a Goodwinian growth model with increasing returns and profit-sharing that tries to picture a simple scenario of the seventies crisis is considered. It is shown that the exhaustion of the Kaldor-Verdoorn “productivity law” can entail, in a nonlinear framework, a “catastrophic” bifurcation from a “high” to a “low” growth path. Slow/fast dynamical systems then allow one to formalize a multiple time-scales dynamics where the growth path is shaped by the structural framework in which it takes place, but has also a long -un feedback. Structural change and crisis appear as long term and endogenous outcomes.     

The role of public policy in closing foreign direct investment gaps: an empirical analysis

Using public policy instruments to attract Foreign Direct Investment (FDI) has become standard in most countries, irrespective of their level of development, geographical location or industrial structure. Against this background the paper analyses the suitability of various public policies to attract inward FDI based on a sample of 11 countries and 10 industries from the manufacturing sector over 10 years. For this aim we derive an empirical baseline model of the determinants of inward FDI-stock. From this baseline model FDI-gaps—measured as the difference between the “estimated actual” inward FDI-stock and the “potential” FDI-stock, which could be realized if a certain “best practice policy” were carried out—are derived. Thereby the analysis focuses on business taxation, public research and development expenditures, the information and communication infrastructure endowment, labor costs as well as institutional and skill-related policies. The analysis inter alia reveals the share of each of these location factors in the total industry- and country-level FDI-gap. Moreover, the analysis explores how policy advice depends on the definition of the “best practice policy”.     

Harvesting in an integrated general equilibrium model

Harvesting of prey biomass is analyzed in an integrated ecological-economic system whose submodels, a predator–prey ecosystem and a simple economy, are microfounded dynamic general equilibrium models. These submodels are interdependent because the ecosystem responds to harvesting—through the reactions of optimizing individual organisms—by changing the provision of public ecosystem services to consumers. General analytical results are derived regarding the impact of harvesting policies on short-run equilibria of both submodels, on population dynamics, and on stationary states of the integrated model. A key insight is that prey biomass carries a positive ecosystem price which needs to be added as a tax mark-up to the economic price of harvested biomass to attain allocative efficiency. Further information on the dynamics is gained by resorting to numerical analysis of the policy regimes of zero harvesting, laissez-faire harvesting and efficient harvesting.

It “... is a matter of weighing costs and benefits of taking action, whether the action is the “inert” one of leaving resources alone in order to conserve them, or whether it involves exploiting a resource ... for so-called material ends”. Pearce (1976, p. 320)

Helpful comments from an anonymous referee are gratefully acknowledged. Remaining errors are the authors’ sole responsibility.     

Endogenous uncertainty and the non-neutrality of money

Summary. We study some implications of the Theory of Rational Beliefs to monetary policy. We show that monetary policy in a Rational Beliefs environment can have an important effect on the characteristics of economic fluctuations. In Rational Beliefs Equilibria money is generically non-neutral unlike Rational Expectations Equilibria in which money is neutral and monetary policy is ineffective. Under Rational Beliefs Equilibria nominal prices and real output change not only in response to changes in the exogenous growth rate of money but also in response to changes in the state of beliefs. In Rational Beliefs Equilibria monetary shocks have real effects even when they are observed but are not fully anticipated. Furthermore, the non-neutrality of money results in a short run Phillips curve. When money “flutters, real output sputters” [8]. We show that Endogenous Uncertainty and the distribution of market beliefs are the major explanatory variables of such fluctuations. Under Rational Expectations monetary policy is ineffective because agents neutralize it by predicting correctly the effect of the policy. Under Rational Beliefs it is shown instead that inflation and recessions can be substantially aggravated by the distribution of market beliefs. Received: January 14, 2002; revised version: April 5, 2002 RID="*" ID="*" I would like to thank Mordecai Kurz for his constant help and support. Most of the ideas developed hereby have been inspired by innumerable and fruitful discussions with him. I have also greatly benefited from helpful comments by Stanley Black, Luigi Campiglio, Carsten Nielsen and Ho-Mou Wu. I also received valuable remarks from participants at the V meeting of “The Society for the Advancement of Economic Theory” held in Ischia, Italy, on July 2-8, 2001, where an initial draft of the present work was presented.     

Identifying the dynamic home market effect in a three-country model

The home market effect (HME) is a distinguishing feature of the “new” trade theory. It is customarily defined as disproportionate positive causation from expenditure to production. Recently it has been argued that this dynamic definition of the HME is problematic in a multi-country framework, because it neglects third country effects. In this paper, we show that more than one exogenous parameter change is needed to overturn the dynamic HME. An isolated increase in the size of the home country will unambiguously lead to an over-proportional domestic industry expansion. We then illustrate with some specific scenario what type of third country effects can “swamp” the HME.      

On the growth and welfare effects of monopolistic distortions

The most fundamental proposition about growth and competition is that there is a tradeoff between static welfare and long-term growth. This paper reconsiders this basic proposition in an expanding variety endogenous growth model with competitive markets for “old” innovative products and for a traditional good. We shed light on some implications of monopolistic distortions which tend to be ignored by standard models. First, no growth may be better than some growth, since modest positive growth potentially requires sizeable static welfare losses. Second, the economy may converge to a steady state with zero growth, even though a locally saddle-point stable steady state with positive growth exists if the initial share of “cheap” competitive markets is sufficiently high, as this implies a relatively low demand for “expensive” innovative goods. Third, such a “no-growth trap” may happen in a world economy made up of several countries engaged in free trade with each other. The policy implications are that growth-enhancing policies may be misguided and that quick deregulation as well as quick trade liberalization can lead to stagnation in the long term.      

Managing Permit Markets to Stabilize Prices

The political economy of environmental policy favors the use of quantity-based instruments over price-based instruments (e.g., tradable permits over green taxes), at least in the United States. With cost uncertainty, however, there are clear efficiency advantages to prices in cases where the marginal damages of emissions are relatively flat, such as with greenhouse gases. The question arises, therefore, of whether one can design flexible quantity policies that mimic the behavior of price policies, namely stable permit prices and abatement costs. We explore a number of “quantity-plus” policies that replicate the behavior of a price policy through rules that adjust the effective permit cap for unexpectedly low or high costs. They do so without necessitating any monetary exchanges between the government and the regulated firms, which can be a significant political barrier to the use of price instruments.     

The physical environment as a global economic concern

From Aristotle to Scitovsky the nature and scope of human economy and economics have remained essentially the same, viz. the prudent/efficient/welfaremaximizing administration/utilization of the scarce resources (chrèmata, “choses utiles,” etc.) comprising the household and the expertise there-of. Aristotle’s protégé, Theophrastus (d. 287 B.C.), went to the extent of counseling that, for the “health and well-being” of all its members (including the livestock), theoikos “should be airy in the summer and sunny in the winter,” it no doubt going without saying that its roof should be kept in good repair. Today, it behooves us to critically re-examine our traditional concepts of wealth, “land,” “the environment,” and the socioeconomic unit whose storehouse of resources is to be managed aright, particularly along the history-of-thought lines presented here. Address delivered at a session on March 25, 1994 at the Midwest regional meetings of the Association for Social Economics, Chicago. The author thanks Tom Coffey (Latin), Brace Malina and Plinio Prioreschi (Italian) for linguistic assistance.     

Environmental Product Differentiation and Environmental Awareness

In this paper, we have considered a duopolistic model of environmental product differentiation with two types of consumers (green and brown) to analyze how environmental awareness affects the environment. “Green” consumers value the physical and environmental attributes of the good they purchase while “brown” consumers only value the physical attributes. We find that more environmental awareness may not be good news for the environment as the firm that produces the good without environmental attributes may increase its sales. The result depends on the degree of product differentiation and the cost to achieve it. Social welfare can also be inversely related to environmental awareness if the negative environmental effect dominates the positive market effect.      

Context and the VSL: Evidence from a Stated Preference Study in Italy and the Czech Republic

We report on the results of a survey based on conjoint choice experiments that was specifically designed to investigate the effect of context on the Value of a Statistical Life (VSL), an important input into the calculation of the mortality benefits of environmental policies that reduce premature mortality. We define “context” broadly to include (1) the cause of death (respiratory illness, cancer, road traffic accident), (2) the beneficiary of the risk reduction (adult v. child), and (3) the mode of provision of the risk reduction (public program v. private good). The survey was conducted following similar protocols in Italy and the Czech Republic. When do not distinguish for the cause of death, child and adult VSL are not significantly different from one another in Italy, and the difference is weak in the Czech sample. When we distinguish for the cause of death, we find that child and adult VSLs are different at the 1% level for respiratory illnesses and road-traffic accidents, but do not differ for cancer risks. We find evidence of a “cancer premium” and a “public program premium.” In both countries, the marginal utility of income is about 20% lower among wealthier people, which makes the VSL about 20% higher among respondents with incomes above the sample average. The discount rate implicit in people’s choices is effectively zero. We conclude that there is heterogeneity in the VSL, and that such heterogeneity is primarily driven by risk characteristics mode of delivery of the risk reduction, and income, while other individual characteristics of the respondent (e.g., age and education) are less important. For the most part, our results are in agreement with environmental policy analyses that use the same VSL for children and adults, and that apply a cancer premium.     

The Influence of Socioeconomic Factors on Economic Growth

The main goal of this paper is to analyse the relationship between social capital and economic growth taking into account the role of fiscal policy from theoretical and empirical points of view. To achieve this goal, “Human Capital and Public Capital Effects on Economic Growth” is focused on the effects of two traditional factors: human capital and public capital effects on economic growth. “Social Capital Effects on Economic Growth” considers qualitative variables introducing some socioeconomic effects on economic growth process analysis. In this case, social capital the main variable will be considered. “Empirical Analysis,” an empirical analysis is developed considering the case of European countries prior to the EU enlargement. Finally, in Conclusions,” the main conclusions will be resumed.      

Economic Incentives and Residential Waste Management in Taiwan: An Empirical Investigation

This paper presents an empirical study of how three waste management policies have affected residential waste generation and recycling behavior in Taiwan over the past decade. The three policies are unit-pricing of garbage in Taipei, a mandatory recycling program in Kaohsiung, and a nationwide policy of charging for plastic bags. We estimate policy effects on total waste, total recycling, and recycling of four specific materials, all measured by weight per capita. Unlike prior work, we find that unit-pricing and mandatory recycling policies lead to significant increases in recycling of most materials, as well as increased levels of total recycling and garbage reduction. The “plastic bag” policy is generally found to lower material-specific and total recycling rates, as well as total garbage volumes.     

Potential Contributions of Political Science to Environmental Economics

While political science has much to offer, at least some of its contributions might be difficult to incorporate into economic models. Nevertheless, we argue that environmental economics might benefit from supplementing, combining, or sometimes even replacing the rational choice approach with other approaches commonly used in political science. We develop our argument by examining three core components of political science analysis: ideas, power, and institutions. For each component we review political science approaches and propositions with a view to determining “what’s in it” for environmental economics.