Spatial dimensions of environmental policies for transboundary externalities: a spatial price equilibrium approach

In this paper we present a framework for analyzing spatial aspects of environmental policies in the regulation of transboundary externalities. A spatial price equilibrium model for two regions is constructed, where interactions between these regions can occur via trade, via mutual environmental spillovers as a result of the externality that arises from production, and via uncoordinated taxes when the regions do not behave cooperatively. The additional complications arising from emissions caused by the endogenous transport flows are also considered explicitly. We consider the performance of production taxes, consumption taxes, and the combination of these two, both with and without optimal policy coordination.