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Transboundary Pollution Externalities Think Globally Act Locally?

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Document pages: 26 pages

Abstract: We analyze the implications of transboundary pollution externalities onenvironmental policymaking in a spatial and finite time horizon setting. Wefocus on a simple regional optimal pollution control problem in order tocompare the global and local solutions in which, respectively, thetransboundary externality is and is not taken into account in the determinationof the optimal policy by individual local policymakers. We show that the localsolution is suboptimal and as such a global approach to environmental problemsis effectively needed. Our conclusions hold true in different frameworks,including situations in which the spatial domain is either bounded orunbounded, and situations in which macroeconomic-environmental feedback effectsare taken into account. We also show that if every local economy implements anenvironmental policy stringent enough, then the global average level ofpollution will fall. If this is the case, over the long run the entire globaleconomy will be able to achieve a completely pollution-free status.

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