Think Locally, Act Locally: Spillovers, Spillbacks, and Efficient Decentralized Policymaking

American Economic Review · 2009 · Volume 99 · Issue 4

Abstract

We analyze models with interjurisdictional spillovers among heterogeneous jurisdictions, such as CO2 emissions that affect the global environment. Each jurisdiction's emissions depend upon the local stock of capital, which is interjurisdictionally mobile and subject to local taxation. In important cases, decentralized policy-making leads to efficient resource allocation, even in the complete absence of corrective interventions by higher-level governments or coordination of policy through Coasian bargaining. In particular, even when the preferences and production technologies differ among the agents, the decentralized system can result in globally efficient allocation. (JEL D62, H23, H73, H87, Q58)

Keywords

Externalities, Taxation and Subsidies: Externalities, Redistributive Effects, Environmental Taxes and Subsidies, State and Local Government, Intergovernmental Relations: Interjurisdictional Differentials and Their Effects, International Fiscal Issues, International Public Goods, Environmental Economics: Government Policy

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