Coordination of environmental policy for transboundary environmental problems?

Abstract

In order to reach a Pareto optimal outcome with transboundary environmental problems, there must be some kind of international environmental agreement. One possibility is to have an international environmental agreement focusing directly on emissions in each country. Given such an agreement, an important issue is whether one ought to supplement the agreement with some kind of policy coordination, or if the choice of environmental policies should be left to each country to decide on unilaterally. It is shown that under “ideal” conditions, Pareto optimality will be achieved without policies being coordinated across countries. Such ideal conditions include among other things that all markets, including the labour market, are competitive. However, if one has imperfect competition in goods markets, or unemployment, decentralized policy making may give an outcome which is not Pareto optimal.