Abstract

SAMPAOLESI, Alejandro. Optimal Environmental Regulation in a Non-competitive Industry with Foreign Direct Investment, Exogenous Technological Change, and Domestic Spillovers. The Case of Developing Countries. El trimestre econ [online]. 2016, vol.83, n.331, pp.565-579. ISSN 2448-718X.  https://doi.org/10.20430/ete.v83i331.211.

This work depicts the design of an optimal environmental regulation when national and multinational firms coexist in a given industry. To accomplish this, we work in a partial equilibrium model and place a small country framework in which foreign direct investment (FDI) takes place. Our results show that, when the domestic firms act under non-competitive conditions and the foreign firms under competitive conditions respectively, such a regulation represents a tax or subsidy on emissions. This is the result of a “production effect”, which reflects the decrease in social welfare associated with a drop in the level of production of the domestic firms, and a “pollution effect”, which reflects the increase in welfare related to the lower level of emissions. Furthermore, when we allow for the possibility that the foreign firms experience an exogenous technological change, generated by means of their headquarters, with spillovers in favor of domestic firms, it is found that the new optimal policy (with technological change) could be greater, equal, or lower than the previous one (without technological change); therefore, we can conclude that the effects of an exogenous technological change on the optimal environmental regulation are uncertain.

Keywords : environment; FDI; technological change; political economy.

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