Environmental taxes, offshoring and welfare: The effects of environmental damage and pollution intensity

Abstract

We analyze the effects of domestic environmental damage and pollution intensity on a monopolist final good producer’s incentive for offshoring a critical intermediate good. Contrary to the usual pollution haven hypothesis, we find that a higher domestic environmental damage, which creates a higher domestic environmental tax, may decrease the incentive for offshoring. This trend is enhanced by a higher pollution intensity of the final good production. Hence, a lower pollution intensity of the final good production may increase offshoring and pollution leakage. Offshoring in our analysis can be excessive or insufficient from the point of view of the domestic country.