TRANSBOUNDARY POLLUTION-CONTROL IN FEDERAL SYSTEMS

We examine the effectiveness of federal environmental policy designed to control transboundary pollution. Federal policy is shaped after the hierarchy of the system, and is controlled simultaneously by regional and central governments; each level controls one of two policy instru ments: pollution abatement and tax. We obtain larger than socially des irable levels of transboundary pollution when the central government i s the policy leader. Federal policy, however, may be socially efficien t when regional governments are leaders whenever income transfers, cho sen by the central government, provide incentives for efficient decent ralized behavior. Our findings are useful to environmental policy desi gn in the European Union. (C) 1997 Academic Press.