A note on environmental federalism: Interpreting some contradictory results

This paper reconciles some conflicting interpretations of recent literature on interjurisdictional environmental regulatory competition. W. E. Gates and R. M. Schwab (1988, J. Public Econom. 35, 333-354; and 1996, ''The Economics of Environmental Regulation'' (W. E. Gates, Ed.), Edward Elgar, London) present a model in which competition to attract investment by lowering environmental standards leads to a Pareto-optimal equilibrium. J. Markusen, E. Morey, and N. Olewiler (1993, J. Environ. Econom. Management 24, 69-86; and 1995, J. Public Econom. 56, 55-77) describe a model in which such competition can result in a suboptimal Nash equilibrium. While it would be possible to draw opposite policy implications from the two models regarding the appropriate degree of environmental federalism, such a conclusion would be incorrect. This paper reconciles the different results by showing that they depend in large part on monopoly profits and tax exporting, not the nature of the pollution externality or environmental federalism. (C) 1997 Academic Press.