Inefficient Local Regulation of Local Externalities

The consequences of commitment failure have been missing from debates about the decentralized regulation of automobile emissions and other sources of local consumption externalities. Even when the direct external effects of such products are limited to a single jurisdiction, the presence of increasing returns‐to‐scale production causes one jurisdiction's choice of regulatory standard to affect the prices and availability of goods elsewhere. Decentralized regulatory equilibria may be inefficient as a result. Because of a commitment failure, production may be split between standards—and consumers denied the full range of products—when it is efficient to have standards that allow products to be consumed everywhere. Coordination failures may cause similar inefficiencies. The results question the usefulness of the principle of subsidiarity as commonly employed.