CESifo working paper: Resource and Environment Economics 3241
We study the political economy of the environment in autocratic, weak and strong democracies when individuals can either mitigate the health consequences of domestic pollution privately or reduce pollution collectively through public policy. The setting is that of a small open economy in which incomes depend importantly on trade in dirty goods, where income inequality and the degree to which ordinary citizens exert voice in each dimension of the policy process distinguishes elites and ordinary citizens. The recognition that the health consequences of pollution can be dealt with privately at a cost adds an important dimension to the analysis of the political economy of environmental regulation, especially for an open economy. When private mitigation is feasible, inequality of incomes leads to an unequal distribution of the health burden of pollution (in accordance with the epidemiologic evidence), thus polarizing the interests of citizens in democracies and of ordinary citizens and elites in non-democratic regimes. Inequality in the willingness to bear the cost of private mitigation in turn interacts with the pollution costs and income benefits of trade in dirty goods to further polarize interests concerning both environmental stringency and the regulation of trade openness. In this context, we show how the eco-friendliness ranking of different political regimes varies with the cost of private mitigation and with the extent of income inequality, tending to converge when mitigation costs are high, and even producing a ranking reversal between democracies and autocracies, and between weak and strong democracies, when costs lie in an intermediate range.
pollution environmental regulation private mitigation income inequality democracy trade welfare collective choice political economy