This paper examines pollution and foreign-capital tax policies on the host country?s welfare when foreign-investment tax credits are absent or present in the source country. In the absence of tax credits, the optimal policy is a pollution tax with a foreign-investment tax or subsidy. The...

Various second-best policy mixes of investment measures and environmental taxes for a polluted, small open economy with foreign capital and immovable trade restrictions are examined. The optimal policy mix depends on the types of trade restrictions. When tariffs are in place, strict policies of...