Environmental Taxes and Wage Setting Structure

The literature on the environment shows that imperfect competition in global markets creates a strategic interaction between governments that can lead to the inefficient distortion of environmental taxes. This literature does not consider that workers can set up different organizational structures to set wages. We assume that under decentralized wage setting there is an independent union in each firm while under centralized wage setting there is an industry-wide union that sets the wages of all firms. We show that under a decentralized structure governments choose environmental taxes closer to those which are socially efficient than those chosen under a centralized structure. However, environmental damage is greater in the former case.