Can cross-border pollution reduce pollution?
Date
2002Source
Canadian Journal of EconomicsVolume
35Pages
805-818Google Scholar check
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We develop a two-country model of foreign aid and cross-border pollution resulting from production activities in the recipient country. There is both private and public abatement of pollution, the latter being financed through emissions tax revenue and foreign aid. We characterize a Nash equilibrium in which the donor country chooses the amount of aid and the recipient chooses the fraction of aid allocated to pollution abatement and the emission tax rate. At this equilibrium, an increase in the donor's perceived rate of crossborder pollution reduces emission levels. © Canadian Economics Association.