COWLES FOUNDATION FOR RESEARCH IN ECONOMICS
AT YALE UNIVERSITY

Box 208281
New Haven, CT 06520-8281

COWLES FOUNDATION DISCUSSION PAPER NO. 1079

Locational Competition and the Environment:
Should Countries Harmonize Their Environmental Policies?

William D. Nordhaus

September 1994

In debates about economic unification or trade liberalization, it is often asked whether harmonization should go beyond taxes and macroeconomic policies to include regulations, particularly environmental policy. This issue also arises when countries, states, and cities engage in competition for plants, jobs, or exports in what we might call "locational competition." This essay analyzes locational competition with particular reference to environmental policy. The conclusions are the following: First, economic efficiency requires harmonization of policies for global environmental issues; second, for local public goods or externalities, there is a strong presumptive case against harmonization; and finally that a competitive "race to the bottom" in environmental policies is inconsistent with countries' following their own economic self-interests.

See CFP 920