International Trade, Factor Movements, and the Environment

By Michael Rauscher | Go to book overview
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The Political Process and Environmental Policy in Open Economies

7.1 The Problem

This chapter introduces the dimension of political economy into the analysis. The issue has been touched upon earlier, e.g. in Chapter 3, where the aspect of labour market objectives has been considered in the framework of the capital mobility model. In this chapter, a similar exercise will be performed in the framework of an international trade model. The difference between this chapter and the two preceding ones, that dealt with trade issues, is the set of questions addressed. In Chapters 5 and 6, we were concerned with the impacts of various policy instruments on factor allocation, trade, and welfare. The ultimate objective was to derive normative policy implications in terms of what should be done by a benevolent government. What are the emission tax rates or environmental standards. that maximize social welfare? This chapter, in contrast, is an attempt to show why these measures are not taken. I will use a public-choice approach and have a closer look at the process of policy formation. The main objective is to show in which direction the outcome of the political process is likely to deviate from what is being regarded as optimal by welfare theorists. In particular, I wish to reconsider the question of ecological dumping. Given that benevolent governments have only limited incentives to engage in eco-dumping, can too lax environmental standards be explained by the particularities of the political process of environmental policy formation in open economies? Moreover, I wish to address the question whether there are incentives to abuse environmental regulation as an instrument of disguised protection and whether or not such measures will be taken.

The optimal policies derived in the previous chapters may serve as a benchmark of what can be achieved; this chapter is a (modest) attempt to explain what is. The economic approach to modelling this is public-choice theory, nowadays often called political economy. We will start the analysis with a summary of some basic insights gained by public-choice theorists. This summary serves the purposes of providing the theoretical background underlying the analysis and of motivating the particular modelling framework used in the remainder of the chapter. This framework will be a partial-equilibrium model, which neglects some of the interdependencies across markets that have been


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