Meeta Keswani Mehra

Interaction between trade and environment policies with special-interest politics

Purpose - The purpose of the paper is to examine the interdependencies between trade and environment policies, as they get jointly determined in a political-economy model of a small open economy. In theoretical literature, government is usually modeled as benevolent. In real economies, however, it is not a pure social welfare maximizer. Lobbies have stakes in the specific policies, and they negotiate with/bribe the government over the latters policy stance. The influence of industry lobbying on both trade and the environment policies at the political equilibrium is the focus of the paper. Design/methodology/approach - Concepts from non-cooperative game theory are used to incorporate a Nash-bargaining game between the industry lobby and government. Government is not benevolent. Campaign contributions help win elections and provide incentive to distort policies to attract lobby contributions. Several situations are modeled. Given a politically set environment policy, tariffs may be zero in view of the free trade agreements. Or, a sequential game is modeled where environment policy is set to maximize social welfare, given a politically determined trade policy. Alternatively, in the full political equilibrium, government and lobby bargain simultaneously over tariff and the environmental tax. Findings - Lobbying implies that government may trade-off one policy for another. When only environment policy is politically manipulable by the lobby, pollution tax is lower than the Pigouvian tax. If, instead, the lobby can influence trade policy only, government provides protection to domestic import-competing sector. In a sequential game, the trade policy outcome does not change, but pollution tax is always higher than the Pigouvian level, even with the environmental lobby absent. With both the policies political, the government “concedes” and offers positive tariff protection, but, not on environment policy; that is, imposes a pollution tax higher than the Pigouvian level. Originality/value - The paper provides useful insights into how, under the influence of special-interest politics, and bargaining between the government and lobbies, the trade and environment policies interact with each other. In comparison with the existing literature on this issue, it derives several stronger and (apparently) counter-intuitive conclusions.

Environmental regulation and intra-industry trade

ABSTRACT The paper analyses complex interactions between intra-industry trade (IIT) and environment by extending Krugmans model of monopolistic competition and trade. It is found that an increase in exogenous environmental tax by a country leads to a fall in its output (the scale effect) and aggregate pollution, and an increase in its number of varieties (the selection effect). With IIT, if Home is a net exporter, an increase in its environmental stringency leads to a negative scale effect, which reduces its export demand and raises its import demand. In contrast, a positive selection effect reduces its import demand. However, the first-order scale effect on exports dominates the second-order effect on imports, implying a rise in Homes share of IIT with Foreign. The opposite holds true when Home is a net importer. Furthermore, the impact of a rise in environmental tax on aggregate welfare comprises the following counteracting effects: a negative scale effect, a positive selection effect, a lower level of aggregate pollution and a higher environmental tax revenue in autarky, and two additional effects, namely, changes in the level of exports and imports, under free trade. The overall change in aggregate welfare, in both autarky and free trade, is in general ambiguous.

A Dynamic Analysis of Special Interest Politics and Electoral Competition

This paper characterizes the solution to differential games in the context of electoral competition between two political parties/politicians, in the presence of voters and a special interest group. The basic structure of the analytical model is similar to Lambertini (https://amsacta.unibo.it/4884/1/415.pdf, 2001, Dynamic games in economics. Springer, Berlin, pp 187–204, 2014), which is extended to model the involvement of a special interest group. Furthermore, voters not only vote but also care for the level of public good provision, while the interest group cares for the regulatory benefit in exchange for financial contribution for campaign expenditure. With a quadratic cost structure, we find that a closed-loop solution collapses to an open-loop equilibrium. Moreover, at the private optimum, the expenditure offered for public good provision, regulatory benefit rendered, voting support from voters, and financial contributions from special interest group received by any political party are always higher than at the social optimum. That is, political parties have the tendency to make excessive offers of expenditure on public good to grab a larger vote share to win the election. Consequently, voters vote retrospectively to the party that offers to overspend more. A higher private optimal regulatory benefit helps the political parties to receive higher financial contributions, which could be potentially used for election campaigns and indirectly contributes to enhance their vote share. The solutions to the control and state variables constitute steady-state saddle point equilibria at both private and social optima.

Indian Perspective on Clean Energy and Energy Efficiency

This chapter presents an Indian perspective on low-carbon growth through increasing energy efficiency and renewable energy. The chapter begins by providing a snapshot of the energy sector in India, followed by a discussion on the state of the electricity sector, with focus on the move toward renewable sources in grid as well as off-grid power modes. The chapter critically reviews the opportunities for energy-efficiency improvement across all the different sectors of the Indian economy, including residential, transport and major energy-intensive industries. The chapter concludes by outlining some recent policy initiatives adopted in India to promote cleaner forms of energy in the electricity sector and energy efficiency measures.

Optimal Public Policy in a Schumpeterian Model of Endogenous Growth with Environmental Pollution

The article utilises a model of endogenous growth with vertical innovation (á la Aghion–Howitt) to examine how the inclusion of a production-related pollution externality affects the prospect for long-run growth of a closed economy. It is derived that the social optimum exhibits the possibility of long-run sustainable growth, such that consumption, capital stock and output grow without bound, knowledge also grows in an unbounded fashion, and both—the intensity and stock of pollution—fall. In comparison, at the unregulated market equilibrium, a clear conflict arises between sustaining economic growth and environment protection, as growing pollution stock ceases the opportunity for long run growth in output, capital stock and consumption. Finally, in deriving the optimal public policy tool-kit, given the distortions in the unregulated market economy, it is shown that a positive and growing rate of tax on pollution, an ad valorem subsidy on capital and a positive R and D subsidy would implement the socially desirable outcome. However, a theoretical possibility of an optimal tax on R and D cannot be ruled out in an exceptional situation of too low a productivity of the R and D sector.