Ecological Dumping under Monopolistic Competition

The competitive choice of emission taxes by two governments is analysed in a model of monopolostic competition with capital mobility where pollution externalities are regional. Assuming that governments have no other policy instrument apart from emission taxes at their disposal, I show that governments choose inefficiently low (high) taxes if the importance of emissions in production is small (large) relative to transport costs and the mark‐up. In contrast to the previous literature, the marginal disutility of pollution is not among the parameters which separate the non‐cooperative choice of emission taxes from the social planner's choice. JEL classification : F 1; H 7; Q 2