ENVIRONMENTAL-POLICY WITH ENDOGENOUS PLANT LOCATIONS

In a game between the governments of two countries, each chooses its o wn environmental policy. The Nash equilibria of the game are generally not Pareto optimal. On the one hand, each country may want to attract industry, giving it an incentive to choose low environmental taxes or standards. On the other hand, if disutility from pollution is suffici ently high, each country might prefer that a firm locates only in othe r countries. This effect tends to make the environmental policy under non-cooperation stricter than it would be with cooperation.