Environmental policy and lobbying in small open economies

Abstract

This paper analyzes consequences of lobby group activity for policy outcomes in economies with transboundary pollution and international environmental policies. International environmental policies are here characterized as pollution taxes determined in a negotiation between two countries. The optimal pollution taxes are characterized and comparative statics are carried out to increase the understanding of mechanisms underlying pollution taxes in the specified setup. It is found, among other things, that the presence of local lobbying may decrease, as well as increase pollution taxes – depending on, e.g. an assumption of symmetry.