Global Environmental Problems and Actions Taken by Coalitions

Transcription

1 Global Envronmental Problems and Actons Taken by Coaltons by Matthas Wrede nversty of Bamberg, Germany * November 997 Ths verson: March 998 Abstract Accordng to the standard theory of externaltes, nternatonal publc goods lke envronmental qualty would be undersuppled by voluntary contrbutons of affected countres. The queston rased n ths paper s whether or not t pays for confederatons lke the European unon to subsdze the contrbutons of ther member states. It s shown that the welfare of the member states ncreases through the ntroducton of subsdes f, on the one hand, the margnal propensty to consume the publc good outsde the confederaton s hgh enough and f, on the other hand, the confederaton s suffcently large n comparson wth the rest of the world. Keywords: Prvate provson of publc goods, subsdes, envronmental qualty JEL-Classfcaton: H4, D6 * Matthas Wrede, Department of Economcs, nversty of Bamberg, Feldkrchenstrasse, D Bamberg, Germany, Phone: , Fax: , E-mal: matthas.wrede@sow.un-bamberg.de

2 - - Global Envronmental Problems and Actons Taken by Coaltons I. Introducton Many serous envronmental problems cross natonal boundares. Partcularly, global envronmental problems such as global warmng through the greenhouse effect or the effects of emssons on the ozone layer are not restrcted to a specfc area. At least approxmately, only the aggregate emssons not the spatal dstrbuton of emssons determne the envronmental qualty whch has therefore the propertes of an nternatonal publc good. Polluton can be consdered as a contrbuton to a publc bad and abatement as a contrbuton to a publc good. It s often argued that nternatonal polcy coordnaton s needed to deal wth global envronmental problems because the ncentves to free-rde are too strong for each country snce each country's contrbuton s small relatve to the aggregate emsson level [see, e.g., OECD (993), pp ]. A Nash equlbrum s characterzed by serous over-provson of the publc bad. By defnton, any unlateral devaton from the Nash equlbrum s harmful for the respectve player (country) n the polluton game. It has been shown by Hoel (99) that under certan crcumstances a unlateral envronment protecton acton ncreases emssons and welfare of neghborng countres whle reducng aggregate emssons. The effect on total welfare s unclear, but welfare wll unambguously ncrease f the unlateral reducton of emssons s taken by the country wth the lowest abatement costs. Nevertheless, f countres are unable to sgn bndng contracts, unlateral actons wll not be taken by self-nterested countres. However, Nash equlbra are not coaltonproof. Therefore, the member states of confederatons such as the European unon can beneft from envronment protecton polces whch are coordnated among themselves. The am of ths paper s to analyze whether the coordnated use of specal envronmental polcy nstruments namely subs-

3 - - des and taxes wthn a confederaton reduces the strctness of the free-rder problem n global envronmental problems. Snce such nstruments wll be used only f the member states of the confederaton are among the benefcares, the man task s to dentfy those who beneft from envronmental subsdes/taxes whch are leved at the confederal level. As mentoned above, the global envronmental qualty can be consdered as a nternatonal publc good whch s or s not voluntary provded. Therefore, we wll refer to the body of lterature dealng wth the voluntary provson of publc goods [see among others, Warr (983), Boadway, Pesteau and Wldasn (989), and Bergstrom, Blume and Varan (986)]. In partcular, the dual approach used by Ihor (996) proves to be useful to answer our queston. The paper s organze as follows. Secton two develops the model and descrbes the equlbrum of voluntary publc good provson. Secton three consders subsdes wthn a confederaton. sng the somorphsm of subsdes and taxes, secton four apples the analyss of subsdes to envronmental charges. Secton fve presents a summary and an outlook. II. The Nash equlbrum We consder two groups of countres, a confederaton and the rest of the world. The confederaton conssts of n by assumpton dentcal member states, the rest of the world conssts of n lkewse dentcal countres whch, however, mght dffer from the member states of the confederaton. Whle the subscrpt s used to dentfy a country wthn the confederaton, the subscrpt ndcates the countres outsde the confederaton. The welfare n a country of type, =,, s determned by the prvate consumpton c and by a pure nternatonal publc good G: () = ( c, G). Both goods are assumed to be normal goods. The amount of the publc good s equal to the sum of the voluntary provded quanttes () G = ng + ng,

4 - 3 - where g denotes the contrbuton of a country of type to the nternatonal publc good. We assume that n each country the natonal ncome Y and the relatve prce p of the publc good n terms of prvate consumpton,.e. the productvty of provdng publc goods, are exogenously gven. Outsde the confederaton the budget restrcton s gven by (3) c + p g = Y. Wthn the confederaton we allow for a confederal subsdy of publc good contrbutons fnanced through a lump-sum tax T. A member state faces therefore the budget constrant c + s pg = Y T, (4) ( ) where s ndcates the rate of subsdy. For notatonal convenence, we defne the relatve prces of the publc good from the natonal perspectve q ( ) := s p and q := p, respectvely. Furthermore, the dsposable natonal ncome s denoted by Y n, so that n n Y = Y T and Y = Y. sng these defntons, the budget constrant n a country of type can be wrtten as (5) c n q G Y q ( G g ) + = +. Snce G s the contrbuton of all countres wth the excepton of the country of type g under consderaton, the RHS s ndependent of the publc good quantty provded by ths partcular country. If countres behave n a Nash fashon and take the contrbutons of other countres as gven, prvate consumpton c and the total quantty of the pure publc good G could be seen as the control varables [ths transformaton has be used by Bergstrom, Blume and Varan (986) and many other authors]. It pays to employ the dual approach whch has been used n a very smlar way by Ihor (996). The expendture functon E ( q ), s obtaned by the mnmzaton of expendtures E = c + q G subject to a utlty constrant =. For later use, we stress E q G + c > 0 and G q < 0, where c ( q, ) and ( ) G q, E q are the compensated demand functons for prvate and publc consumpton, respectvely. Fur-

5 - 4 - thermore, snce publc and prvate consumpton are normal goods, G unambguously hold. > 0 and c > 0 sng the budget constrant and the defnton of the expendture functon, (6) E n ( q, ) = Y + q ( G g ) holds. Besdes, at the equlbrum the publc good G s n each country equal to the compensated demand G ( q ), for the publc good. Fnally, we assume that each country actually provdes some quantty of the publc good at the equlbrum. Altogether, the Nash equlbrum s characterzed by (7) (, ) + (, ) ( ) ( n n ) qq G ( q ) G ( q ) G ( q ) n q E q n q E q n q Y T n q Y +, = 0,,, = 0. III. Subsdy Totally dfferentatng (7), yelds (8) ( ) nq E n + n qqg n qe G G ( ) nq g n + n qq G + G q d d q nq dq + dt 0 =. 0 Let us suppose that the confederaton encourages voluntary contrbutons to the nternatonal publc good through a subsdy whch s fnanced by a lump sum tax. We exclude any nternatonal sde payments. The budget constrant at the confederal level, therefore, s (9) T g s p g ( p q ) = =. It requres for any change n the level of subsdng (0) dt = spdg gdq. Furthermore, by defnton,

6 - 5 - () dq = pds. Insertng () and (0) nto (8) at s = 0, the welfare effects of ntroducng the budget neutral subsdy can be calculated. For ths purpose we defne and calculate () ( ( ) ) = n E n + n q G q G n E q G = n c q G n c q G q G q G < 0. Snce (3) d ds = n p q E G q s unambguously postve, the rest of the world benefts from a subsdy wthn the confederaton. In contrast, the sgn of d ds (4) ( n n ) p q EG q q G = + n E s ambguous. The member states themselves, however, proft from the subsdy f (5) q G E > n n + n s fulflled. The LHS s the margnal propensty to consume the publc good n a representatve country outsde the confederaton d( q G ) de and the RHS s approxmately the share of the rest of the world n the total populaton. As the followng proposton states: Proposton : Introducng a lump-sum-tax fnanced subsdy of contrbutons to an nternatonal publc good n a confederaton, always ncreases welfare n the rest of the world, but also ncreases welfare n the member states f the margnal propensty to consume the publc good s suffcently large n the rest of the world, namely hgher than approxmately the share of the countres outsde the federaton n the total populaton.

7 - 6 - Accordng to the normal good assumpton, the LHS s postve but smaller than one snce the margnal propensty of prvate consumpton s also non-negatve. If n =,.e. f the subsdy s a unlateral measure by a sngle naton, the RHS s always one. Therefore, a sngle naton wll never beneft from an nternal subsdy, whch s n fact nothng else than a prce dstorton. If more than one country ntroduces a subsdy, not only the outsders but also the nsders mght be among the benefcares. Holdng the total number of countres n:= n + n fxed, the larger the confederaton s, the smaller s the RHS ( n n ) ( n ), whch approaches zero as the confederaton covers more and more the whole world. Therefore, t s more lkely that the member states of a confederaton gan from a subsdy f the number of countres whch form the coalton s large. If n >, the subsdy s not necessarly a harmful prce dstorton. Rather, each member state benefts from the relatve prce change, caused by the subsdy, n the other member states. To fgure out ths argument more carefully, let us consder the mpact of the sub- sdy on the voluntary contrbutons. Snce dg ds = G d ds > holds, the subsdy 0 leads to an ncrease n the overall publc good consumpton. From the fact that the rest of the world benefts from the subsdy and that the relatve prce does not change outsde the confederaton, one can conclude that the subsdy shfts the budget constrant n these countres outwards. But snce publc and prvate goods have the normal good property, n reacton to the outward shft of the budget constrant the countres outsde the confederaton reduce ther contrbutons. Hence, only the member states of the confederaton provde more publc goods. Thus, we observe (6) dg > 0, dg ds ds > 0, and dg ds < 0. However, snce all member states of the confederaton ncrease ther contrbutons, each of these countres beneft as long as the non-member states do not reduce ther contrbutons too much. The degree of reducton of non-member states depends on the margnal propensty to consume because both an ncrease n ncome and hgher contrbutons of

8 - 7 - other countres yeld to an outward shft of the budget constrant. The movement from pont A to pont B n fgure shows the effect of the subsdy on the non-member countres. Fgure :How a subsdy n a confederaton affects non-member countres c A B G Fgure demonstrates the mpact of the subsdy on a member state. The budget constrant s flatter f the subsdy s enacted. In fgure.a welfare shrnks from A to B because non-member states reduce ther contrbutons to a larger extent than member states ncrease them. Fgure.b shows the opposte case. Member states beneft from the subsdy, too. Ths knd of pcture has been used by Atknson and Stgltz (980), p. 507.

9 - 8 - Fgure :The effect of ntroducng a subsdy n a confederaton on member countres c c B A A B G G a b Fnally t s also of nterest how the subsdy affects total welfare W = n + n, n partcular, f the condton of the proposton s not fulflled. Summarzng the effects on countres welfare, yelds (7) dw ds = ( + ) n n n pqq G G q nnp + q E G q E G [ q q]. Whle the frst term s postve, the sgn of the second term s ambguous. However, n a symmetrc stuaton,.e. f the confederaton and the rest of the world are equal, the terms n the square brackets cancel out, so that ntroducng a subsdy ncreases worldwde welfare. Moreover from the proposton follows that, f the margnal propensty to consume the publc good s suffcently large n the rest of the world, namely hgher than approxmately the share of the countres outsde the federaton n the total populaton, both countres beneft from the subsdy. Total welfare obvously rses. Otherwse, the total welfare effect s ambguous. IV. Envronmental charges An envronmental charge leved by the confederaton and to be pad by the countres can be consdered as a subsdy on natonal effort to contrbute to an nternatonal publc

10 - 9 - good. Suppose G s a publc bad, wth g, g, G <. The closer G to zero s, the hgher s 0 utlty. The complete analyss can be adopted wth only one mnor change: The rate s s and the revenue from the charge s redstrbuted n form of a lump-sum transfer T. The results can be stated as Proposton : Introducng an envronmental charge on the contrbutons to an nternatonal publc bad n a confederaton of whch revenue s redstrbuted n a lump-sum fashon, always ncreases welfare n the rest of the world, but also ncreases welfare n the member states f the margnal propensty to reduce consumpton of the publc bad s suffcently large n the rest of the world, namely hgher than approxmately the share of the countres outsde the federaton n the total populaton. sng the analyss presented above, t s obvous that a envronmental charge whch has to be pad by a sngle country s harmful to ths country. Ths partcular case has been prevously studed by Hoel (99). V. Concludng remarks Internatonal publc goods wll be undersuppled as long as bndng contracts are mpossble. nlateral ntroducton of envronmental subsdes/charges by one country s harmful for the eco-poneer. It s, however, not necessary to form a coalton whch covers the whole number of countres affected by the publc good. Smaller coaltons, namely federatons or confederatons, wll beneft from subsdng contrbutons to publc goods (from taxng contrbutons to publc bads) f the margnal propensty to consume the publc good (to reduce consumpton of the publc bad) s suffcently large n the rest of the world, namely hgher than approxmately the share of the countres outsde the federaton n the total populaton. Furthermore, there s theoretcal evdence that larger coaltons are more lkely to proft from subsdes/taxaton. The basc message of the model s that powerful and large coaltons such as the European unon should serously consder ntroducng envronmental subsdes/taxes even f the underlyng envronmental problem s not restrcted to Europe or f t s n fact

11 - 0 - a global problem. The model suggests that taxes as envronmental polcy nstruments to deal wth global envronmental problems ought to be not on the natonal but on the European agenda. Even global envronmental problems are partally wthn the scope of European envronmental polcy. However, coalton polces are only mperfect substtutes for worldwde cooperaton on the greenhouse effect and the hole n the ozone layer. Ths analyss could also be appled to natonal envronmental problems whch could be dealt wth by states, and to statewde polluton whch can be partally solved by communtes. References Atknson, Anthony B. and Joseph E. Stgltz (980). Lectures on Publc Economcs. McGraw Hll. London and New York. Bergstrom, Theodore, Blume, Lawrence and Hal Varan (986). On the Prvate Provson of Publc Goods. Journal of Publc Economcs Boadway, Robn, Pesteau, Perre and Davd Wldasn (989). Tax-Transfer Polces and the Voluntary Provson of Publc Goods. Journal of Publc Economcs Hoel, Mchael (99). Global Envronmental Problems: The Effects of nlateral Actons Taken by One Country. Journal of Envronmental Economcs and Management Ihor, Toshhro (996). Internatonal Publc Goods and Contrbuton Productvty Dfferentals. Journal of Publc Economcs OECD (993). Taxaton and the Envronment. Complementary Polces. Pars. Warr, Peter G. (983). The Prvate Provson of a Publc Good s Independent of the Dstrbuton of Income. Economcs Letters