LOCATIONAL CHOICES OF FIRMS AND DECENTRALIZED ENVIRONMENTAL-POLICY WITH VARIOUS INSTRUMENTS

Suppose there exists a federation with a given number of mobile firms generating waste emissions in the jurisdiction in which they locate. T his paper demonstrates that if jurisdictions use emission taxes or mar ketable emission rights to control pollution within their boundaries a nd distribute the revenues captured by these instruments in a socially efficient way, firms locate efficiently, taking their pollution exter nalities into account. Decentralized environmental policy relying on d irect controls, however, prevents locational efficiency of mobile firm s. Furthermore, if jurisdictions are small, decentralized environmenta l policy with emission taxes and marketable pollution rights also supp ort an efficient environmental quality, while a policy using direct co ntrols sets too high emission standards. (C) 1995 Academic Press, Inc.