Abstract
The paper highlights that the race-to-top result shown by Wellisch (J. Urban Econ. 37:290–310, 1995) and Kunce and Shogren (J. Environ. Econ. Manage. 50:212–224, 2005a) may be exacerbated by inter-jurisdictional commuting, leading to increased NIMBY behavior (Not-In-My-Back-Yard) among metropolitan jurisdictions. Local governments try to push polluting economic activities to the neighboring jurisdictions, while commuting guarantees their residents’ labor income. Commuting generates a leakage of the local production benefits of pollution as non-resident commuters take the wages to their home jurisdictions. Jurisdictions may thus face a prisoners’ dilemma, in which they all push for pollution levels that are too low (race-to-the-top). Fiercer competition in the common labor market due to a larger number of jurisdictions intensifies this race-to-the-top in environmental regulation; whereas transboundary pollution, local ownership of firms, pollution taxes, and payroll taxes reduce the incentive for overly restrictive pollution policies.
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Notes
This result is similar to the underprovision of local public goods in the “business tax models” with jurisdictions competing for mobile capital (e.g., Wilson 1986; and Zodrow et al. 1986). Empirical evidence for a race-to-the-bottom in environmental regulation is weak, and some studies suggest a race-to-the-top (e.g., Fredriksson and Millimet 2002; Fredriksson and Gaston 2000; List and Gerking 2000; Millimet 2003). Fredriksson et al. (2004) explain that important own- and cross-policy interactions may exist, and that literature covering uni-dimensional frameworks presents lower bound estimates of the degree of strategic interaction.
It considers the effects of pollution on production and consumption, disregarding other effects.
Jurisdictions can be interpreted as counties, municipalities or districts in metropolitan areas.
As in Oates and Schwab (1988), Wellisch (1995), and Kunce and Shogren (2005a, 2005b, 2007), the direct command-and-control regulation can be interpreted as allocating pollution quota to each firm, or issuing tradable or non-tradable permits that allow each firm to emit a fixed amount of pollution. The pollution rents equal the value of the quotas or permits. In Sect. 6, a pollution tax is used.
This assumption is realistic in the short run when transaction costs of moving are high, e.g., due to the tax structure in the housing market, most European countries are examples. Hamilton (1982) shows that in the United States locations of workers and jobs are poorly matched (there is much “wasteful commuting”), suggesting that the transaction costs of moving might be very significant in the United States, too.
Oates and Schwab (1988), Wellisch (1995) and Kunce and Shogren (2005a, 2005b, 2007) use a similar approach for the social efficiency. We implicitly assume perfect redistribution possibilities across jurisdictions. Under this condition, it is sufficient to maximize utility of jurisdiction 1 keeping the utilities of the other jurisdictions constant.
A positive F NP reflects labor and pollution being complements. This is realistic with strongly aggregated inputs as in this model. These assumptions guarantee a perfect competition solution. All properties and derivations can be found in the appendices.
Although the Nash equilibrium is a standard concept in fiscal competition, its existence and uniqueness is among the most persisting problems. Most authors merely assume the equilibrium’s existence, as the problem needs demanding assumptions (e.g., Bucovetsky 1991; Laussel and Le Breton 1998). Bayindir-Upmann and Ziad (2005) relax these assumptions, using the concept of 2nd-order locally consistent equilibrium (2-LCE) for the Zodrow and Mieszkowski fiscal competition model (1986). The 2-LCE concept ensures that a set of local maxima is reached in equilibrium. No jurisdiction faces an incentive to deviate unilaterally from its equilibrium strategy by some small readjustment of its strategic variable. Whether these relaxed assumptions also apply for this model is a topic for future research.
The non-environmental local public goods provided by the local government will only be introduced in Sect. 6.
In (9), by slightly changing the exact meaning of γ, we could replace γ with (n−1) γ.
The rest of the world is represented by subscript 3, and R 3 is completely exogenous to our metropolitan area.
From the linear homogeneity of production, the value of output in any jurisdiction equals the wages paid to workers plus the value of pollution rents (the value of permits to pollute given to firms). If there is no pollution regulation in jurisdiction i, the ratio P i /N i expands to the point where F P =0 and pollution rents are zero.
In the symmetric equilibrium (N e ,P e ) we find that N 0=N 1=N 2=N e ,R 1=R 2=R e and P 1=P 2=P e .
With the socially efficient level of P e , (6) is in balance. If the right-hand side of (15) is smaller (larger) than the right-hand side of (6), then (15) must be brought into balance. Given that all partial derivatives of F in (15) are evaluated with N=N 0, the only thing that can affect the right-hand side of (15) is a change in P e relative to the socially efficient level. If P e goes down (up), then F P goes up (down), so the right-hand side of (15) goes up (down). This assumes that the change in F P dominates any possible change in F NP , since these changes might or might not be in opposite directions. Also, if P e goes down (up), the equilibrium value of E goes down (up) (see (11)) and the equilibrium value of C goes down (up), so the marginal rate of substitution –U E /U C , which is positive, goes down (up).
Braid (2000) is analogous with lower commuting costs increasing the under-provision of a local public good if there is no lump-sum tax available to local jurisdictions. In this paper, however, we get a race-to-the-top in local environmental quality if commuting costs are low and only a lump-sum tax is available.
In section 7, it is explained that many countries limit the use of taxes as policy instruments by the local governments.
In the symmetric equilibrium, the tax rates are equal across the jurisdictions, a 1=a 2=a 0,b 1=b 2=b 0,t 1=t 2=t 0.
The tax revenues are redistributed as a lump-sum subsidy to the residents of the jurisdiction. As the availability of a lump-sum tax leads to the efficient level of non-environmental public goods, the net lump-sum transfer can be positive, negative or zero. This is similar to the outcome of Sect. 4.5 in Braid (2005) where the local jurisdictions in a metropolitan area have a positive payroll tax rate and a lump-sum tax that can be positive, zero or negative.
For example, only 16 out of the 50 US states allow local governments to use residence-based wage or income taxes. Source-based payroll taxes are merely used in 5 states. In the Anglo-Saxon world, property taxes are by far the most important source of local tax revenue (Braid 2005). In other countries, the local tax revenues are more balanced. In Japan, Germany, Sweden, and Denmark, residence-based income taxes are the main source of local revenue. Belgian municipalities levy around 20 different taxes, accounting for about 47 % of their budget. The remainder is (mainly) covered by dividends from gas and electricity utilities (9 %) and transfers from higher government levels (40 %). Residence-based income taxes and property taxes make up about 20 % of the total municipal budget each. Taxes on firm profits (2 %) or environmental taxes (3 %) are relatively insignificant.
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Acknowledgements
I would like to thank J. Wilson (the editor) and 2 anonymous referees for their constructive comments. Stef Proost, Ralph Braid, Andre Decoster, Jo Swinnen, Bruno De Borger, Pierre Pestieau, Jacques Thisse, Jean Cavailhès, and Sandra Rousseau contributed to earlier versions. I am also grateful to the participants of the workshop on “The role of open space and green amenities in the residential move from cities” (Dijon 2005), “The 5th Journées Louis-André Gérard-Varet” (Marseille 2006), WCERE 2006, and EEA 2006.
The opinions expressed in the paper belong to the author only, and should not be attributed to the institution he is affiliated to.
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Appendices
Appendix A: Comparative-static derivatives
In the paper, we are interested in a symmetric equilibrium in which the endogenous variables are the same in all n jurisdictions. All partial derivatives of F are evaluated at the following symmetric equilibrium: N 0=N 1=N 2=N e ,P 1=P 2=P e .
1.1 A.1 Pollution
Equation (14) can be derived as follows. Differentiating (4) and (12) for i=1 and 2 with respect to P 1 yields
Equating the right-hand sides of (27) and (28), and using (26) at symmetric equilibrium, we find
1.2 A.2 Payroll tax
Equation (31) is the equivalent of (14), but now with a payroll tax, b, instead of pollution, P, as policy instrument, and it can be derived as follows. Differentiating (4) and (21) for i=1 and 2 with respect to b 1 (and P 1 is exogenous as it is still determined by the jurisdictional government) gives
Equating the right-hand sides of (30) and (31), and using (29) at symmetric equilibrium, we find
Appendix B: Conventional model
Appendix B proves (15). Using (8) and (9), and using (12) with i=1, the Lagrangian is
Or, using (13) for i=1 and i=2, and using NF N +PF P =F (from the homogeneity of degree one of F(N,P)),
In (34), A is the total wage sum paid in jurisdiction 1, B is the correction for the commuters’ wages, C is the revenue share from the polluting rents in all jurisdictions, and D is the total cost of consumption in jurisdiction 1.
-
The FOC for consumption is
(35) -
The FOC for pollution is
(36)
Simplifying (36), using (26), and using the symmetric equilibrium conditions such that all superscripts on all partial derivatives can be dropped, we find
Using (14) and a small amount of algebra, and using equality of mixed partials (F NP =F PN ), this becomes
Using (38), (11), and using NF NP +PF PP =0, and F NN F PN =F NP F PN (from the homogeneity of degree one of F(N,P)) yields
Using (35) and (39) yields (15) of the main text.
Appendix C: No commuting
Appendix C proves (16). Since the constraint (4) is replaced by the no-commuting condition that N 1=N 2=N 0, conditions (12) and (13) can be rewritten slightly and substituted into (9), so maximizing (8) leads to the following Lagrangian:
-
The FOC for consumption is
(41) -
The FOC for pollution is
(42)
Using (11) and, using NF NP +PF PP =0 (from the homogeneity of degree one of F(N,P)), it follows
Combining (41) and (43) leads to (16) in the main text.
Appendix D: Nash equilibrium with pollution tax
Appendix D proves (20). Using (8) and (19), the Lagrangian is
The firms in each jurisdiction consider t as a parameter and produce until t=F P , which is (17). The paper assumes that (17) holds for all jurisdictions in the metropolitan area, so using (18) R 1=R 2=0 (it does not matter whether or not R 3=0, since it is exogenous). Using this, (12) with i=1, and using NF N +PF P =F (from the homogeneity of degree one of F(N,P)), and then using (17) with i=1, (44) becomes
-
The FOC for consumption is
(46) -
The FOC for pollution tax is
(47)
Simplifying (47) by cancelling terms, using (11), and using the symmetric equilibrium conditions, we find
Using (46) and (48) yields (20) of the text.
Appendix E: Nash equilibrium with payroll tax
Appendix E proves (25). Using (8), and using NF N +PF P =F (from the homogeneity of degree one of F(N,P)), and substituting (13) and (21) into (22), the Lagrangian is
-
The FOC for consumption is
(50) -
The FOC for pollution is
(51)
Simplifying (51) by cancelling terms, then using the symmetric equilibrium conditions, and using (14) and (26), it becomes
Using (11) and doing some algebra, this becomes
Combining (53) and (50) results in (23) of the text.
Differentiating the Lagrangian (49), the FOC for the payroll tax is
Simplifying (54) by canceling terms, then using the symmetric equilibrium conditions, and using (29) and (32), (54) becomes
Factoring out λ 1 and δN 1/δb 1 from (55) and simplifying yields (24) of the text, and the combination of (23) and (24) yield (25) of the text.
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Saveyn, B. On NIMBY and commuting. Int Tax Public Finance 20, 293–311 (2013). https://doi.org/10.1007/s10797-012-9228-x
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DOI: https://doi.org/10.1007/s10797-012-9228-x