EFFICIENCY OF ENVIRONMENTAL-POLICY INSTRU MENTS IN A SPATIALLY ORGANIZED ECONOMY

This paper develops an efficiency criterion to evaluate environmental policy instruments in a spatial economy. We call an environmental poli cy regime at the regional level efficient if it guarantees not only an efficient distribution of emission permits within a region, but also an optimal distribution of mobile firms across the regions of a federa tion. Hence, an efficient instrument must guarantee that firms interna lize environmental costs in choosing their location. Using marketable pollution rights or emission taxes, efficiency in this broad sense can only be achieved if revenues of regional environmental agencies are n ot transferred to regional firms. Direct controls neither support an o ptimal distribution of emission rights within a region nor an optimal locational pattern of firms.