Harmonization and optimal environmental policy in a federal system with asymmetric information (Q1975959)

From the conclusion: In this paper the author has used a simple model of environmental dumping to provide a rationale for a federal government to intervene in the environmental policies set by state governments. It is commonly supposed that such intervention requires the federal government to impose a harmonized set of environmental policies across states. It is well known that such an approach is not optimal if states differ in their environmental characteristics, and the federal government should set policies which reflect differences in environmental characteristics. If the federal government does not know the environmental characteristics of individual states this constrains the environmental policies it can set, and he has shown that this asymmetry of information narrows the differences in policies for states with different ex post environmental characteristics compared to the policies that would be set with full information. However, this does not justify harmonization, and he has shown that the welfare cost of harmonization rises exponentially with the variance in damage costs across states, and can erode all the benefits from coordinating environmental policy at the federal level.