Abstract
It has been argued by several economists1 that regulatory capture by industries whose activities have negative environmental effects may induce governments to set too low environmental standards, in particular if the preservation of competitiveness of export or import-competing industries is at stake. If undertaken unilaterally, eco-dumping yields benefits for pressure groups2.
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References
Hoekman & Leidy [1992&1994], Klepper [1992], Ursprung [1992], VanGrasstek [1992].
Shown by Hoekman & Leidy [1994], and Rauscher [1997, ch.7] in partial equilibrium models, and Rauscher [1994&1995d], and Ursprung [1992] in general equilibrium models.
See Shrybman [1992, 100]: “Restrictions on the use of import controls, together with pressure from the corporate sector to achieve a ‘level playing field’, create a powerful disincentive for... countries to regulate.”
We revert to the original model specification as developed in chapter 3, i.e. the numeraire is again good x.
The particular functional form of limplies that welfare of producers in the x industry is simply given by their output. This assumption is made for simplicity; we discuss alternatives below.
The welfare effects are determined for unbiased social welfare, i.e. w without the political support function l Welfare wL including the political support function is referred to as biased welfare.
By definition, the policy choice in the absence of regulatory capture attains the welfare optimum. Since (unbiased) social welfare is single peaked, any deviation from the optimal policy choice implies a welfare loss.
We assume that all the necessary conditions for a Nash equilibrium in environmental taxes are fulfilled for taxes set under regulatory capture; therefore, the derivation of the Nash equilibrium in chapter 4 above applies.
Owing to our assumption that the country under consideration is small, the world price effect of the tariff is zero; for brevity we drop the relevant term.
Some algebraic manipulations are necessary.
Eco-dumping already causes a distortion.
This optimum is constraint by the fact that we limit government in the choice of its instruments; the first best instrument to achieve a production expansion would be a subsidy.
If we compare (6–9) with (6–14), we observe that the eco-dumping term is 0 if government can maximise its objective function without constraints.
In a first best world of small open economies, welfare-maximising governments have no reason to introduce trade restrictions — i.e. to deviate from optimal trade policy — if there are no market failures (see for example Krugman & Obstfeld [1997, 216pp]). Compare chapter 2 where we established a comparable result for environmental policy: in small open economies with no market failures other than an environmental externality governments have no reason to deviate from optimal environmental policy, i.e. a Pigouvian tax.
The term ‘regulatory capture’ is not the only notion for the phenomenon that governments deviate from optimal policies because they are influenced by interest groups. Alternative terms are political economy approach or — when trade policy in particular is discussed -endogenous protection.
See Rodrik [1995, 1480–1487] and Hillman [1989, 133–149], whose literature reviews include empirical parts in which they summarise evidence for trade protection across industries, countries and time.
Following Rodrik [1995], the various models are categorised as follows: tariff formation approach, political support function approach, median voter approach, campaign contributions approach, and political contributions approach.
The policy maker hence maximises a function which trades off the gains from protection of the favoured industry against the losses to the general population. Politicians follow their self-interest in this approach. The industry captures the regulatory process either by contributing to politicians’ campaign, thereby increasing the probability of reelection or simply by handing out bribes, thereby increasing politicians’ income.
Quote from Krugman & Obstfeld [1997, 70/71] or Gandolfo [1994, 112pp].
Alternative explanations consistent with the Heckscher-Ohlin-Samuelson framework would be that factors are imperfectly substitutable or that regional interests are pursued by interest groups (see Hillman [1989, 14;26]).
The principle of ‘optimal obfuscation’ proposed by Magee et al. [1989] supports this argument: Indirect policies such as environmental policy measures lend themselves to manipulation because their effects are not likely to be observed by those who bear the costs.
In this context, it may be puzzling that trade policy is sought to achieve income redistribution since trade policy is a rather inefficient means to attain this goal (see Dixit [1985]). Two tacks are suggested to reconcile the observed use of trade policy for redistribution with its economic inefficiency to achieve such a goal: it is possible that tariffs are preferred because their economic inefficiency makes them hard to use; alternatively, incomplete information may increase the attractiveness of tariffs for redistribution (see Rodrik [1995, 1470–1474]).
This refers to GATT/WTO regime; goods covered in special sub-agreements such as agricultural products and textiles may have considerable tariff or quota protection.
The use of such policies is labelled contingent protection because it is triggered by price and injury contingencies; see Markusen et al. [1995, 354].
Since a small country cannot affect the world price level, the effect of a conditional eco-tariff charged by a small country is certainly nil; so we do not analyse this case further.
Furthermore, there is little reason to presume that an x exporting country would not implement an environmental tax since this tax has positive environmental and terms of trade effects.
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© 2000 Springer Science+Business Media Dordrecht
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Kraus, C. (2000). Tariffs to Counteract Eco-dumping Caused by Regulatory Capture. In: Import Tariffs as Environmental Policy Instruments. Economy & Environment, vol 19. Springer, Dordrecht. https://doi.org/10.1007/978-94-015-9614-5_6
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DOI: https://doi.org/10.1007/978-94-015-9614-5_6
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