Political economy models of trade and the environments in a federal system

Abstract

This thesis extends existing literature by linking strategic competition and political economy analysis of global trade and environment issues when there are two levels of government.  The economic setting is a strategic trade model in which two identical firms, located in different states and engaging in Cournot competition, produce a single good for export to a third market.  Production generates pollution; this can be abated but at a cost.  The only policy available to governments is an emission standard, which is set prior to firms’ productions decision.  The level of damage costs is private information that becomes available only to national governments and only when elected.  The institutional structure is that of a federation.  The federal authority need not be an explicit government but can more generally be thought of as a supra-national or intergovernmental agency.  The policy can then be set non-co-operatively at the level of the nation state or co-operatively by the supra-national agency.  The political model is one where two ideologically motivated parties (industrialists and environmentalists) compete for office.  They differ in the weight they place on the environment.  The election outcome is influenced by donations made by lobby groups.  A similar process takes place at the federal level.  Chapter 1, by way of introduction, provides an overview of the literature on trade and environment.  Chapters 2 (without lobbying) and 5 (with lobbying) address some constitutional issues.  (i)  Should policy be set at the national or supra-national level?  It is shown that it always better to set policy at a supra-national level - that is, the benefits of co-operation outweigh the problems of asymmetric information.  (ii)  Should politician be allowed to set discretionary policies?  The benefit is that they can use the true level of damages; the drawback is that they are subject to a political influence.  The alternative is social pooling: mandating a policy based on ex-ante expected damage costs.  It is shown that political discretion is preferable as the difference in states’ damage costs diverge and social pooling is appealing when the political parties diverge.  (iii)  Should policies be harmonised at a supra-national level to overcome incentive to engage in environmental dumping?  It is shown that harmonisation is never worthwhile at the supra-national level if it is not also better at the state level.  Chapters 3 (with purely domestic pollution) and 4 (with transboundary pollution) address the concerns that setting policy at a supra-national level brings with it a further set of problems.  These include a democratic deficit if policy making shifts from elected national MPs to un-elected bureaucrats and the asymmetric power wielded internationally by industrial lobby groups and Northern countries.  It is shown that this greater influence may actually make these groups or nations worse off if it encourages them to engage in too much wasteful lobbying.  It is also shown that whatever the problems associated with the global co-ordination of policies, they are still outweighed by the benefits, fundamentally the elimination of environmental dumping.  Chapter six concludes.

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