Subsidies to Industry and the Environment

Governments support particular firms or sectors by granting low interest financing, reduced regulation, tax relief, price supports, monopoly rights, and a variety of other subsidies. Previous work in partial equilibrium shows that subsidies to environmentally sensitive industries increases output and pollution emissions. We examine the environmental effects of subsidies in general equilibrium. Since all resources are used, whether or not subsidies increase emissions depends on the relative emissions intensity and incentives to emit of the subsidized industry versus the emissions intensity and the incentives to emit of the industry which would otherwise use the resources. Since subsidies must move resources to a less productive use, the economy wide marginal product of emissions falls with an increase in any subsidy, tending to decrease emissions. On the other hand, subsidies tend to move resources to more emissions intensive industries. Thus, subsidies increase pollution emissions if resources are moved to an industry for which emissions intensity is high enough to overcome the reduction in emissions caused by lower overall marginal product of emissions. We show that, under general conditions, subsidies also increase the interest rate, thus causing the economy to over-accumulate capital. Steady state emissions then rise, even if emissions fall in the short run. We also derive an optimal second best environmental policy given industrial subsidies. The results indicate that, under reasonable conditions, subsidies raise the opportunity cost of environmental quality in the long run. Finally, we examine the relationship between growth and the environment with subsidies. Under more restrictive conditions, reducing some subsidies may offer a path to sustainable development by raising income and at the same time improving the environment.Subsidies, pork, price supports, output subsidies, input subsidies, pollution, emissions.

Dynamic Regulation Design Without Payments: Timing is Everything

We consider a two period model of optimal regulation of a firm subject to marginal compliance cost shocks. The regulator faces an asymmetric information problem: the firm knows current compliance costs, but the regulator does not. Both the regulator and the firm are uncertain about future costs. In our basic framework, the regulator may not offer payments to the firm; we show that the regulator can vary the strength of regulation over time to induce the firm to reveal its costs and increase welfare. In the optimal mechanism, the regulator offers stronger (weaker) regulation in the first period and weaker (stronger) regulation in the second period if the firm reports low (high) compliance costs in the first period. Low cost firms expect compliance costs to rise in the future, and thus prefer weaker regulation in the second period. High cost firms expect costs to fall in the future and thus prefer regulation which becomes more strict over time. Thus the regulator offers the low (high) cost firms slightly weaker (stronger) regulation in the second period in exchange for much stronger (weaker) regulation in the first period. We refer to our dynamic mechanism as “timing” the regulation. If the regulator can make payments, then the optimal mechanism to some degree times the regulation as long as a positive cost of funds exists. If the cost of funds is high enough, then under the optimal mechanism the regulator will not use payments and only use our timing mechanismregulation design, environmental regulation design, hybrid policies, dynamic contracts.

Economic Growth and the Environment: Theory and Facts

Several recent papers propose competing theoretical explanations for the empirical observation of an inverted U-shape relationship between enviromental degradation and per-capita income. We proprose the following test of the theory: calibrate a theoretical model to an already developed economy using information unrelated to the pollution-income curve. Then simulate the model starting from a less developed initial condition and compare the predicted pollutionincome relationship with that in the data. Our results are mixed. Some support exists for the theory that the inverted U-shape results from a corner solution in which less developed countries do not abate pollution. However, pollution peaks at a level of per capita income that is much lower than that observed in the U.S. data.Growth, Environment, pollution, emissions, Environmental Kuznets Curve, Stock Externalities, Calibration

Liquidity and fire sales

A “fire sale” occurs when the owner of a good offers it for sale at a price strictly below the price that some buyers would willingly pay for the good. He does so because the advantage of the quick sale made possible by the lower price outweighs the higher price that other potential buyers would pay, given the likely delay in locating these buyers in the latter case. Fire sales can occur only in illiquid markets. This paper generalizes earlier treatments of illiquid markets by assuming that the asset can be offered for sale at any time, rather than only after its owner loses his capacity to operate it profitably. Also, it specifies that profitability follows a random walk.Liquidity (Economics) ; Econometric models

Cotton in West and Central Africa: Adapting a Successful Model to New Realities

Produced for review by the United States Agency for International Development under the WACIP project funded by USAID (Programme de Renforcement du Secteur Coton en Afrique de l'Ouest et du Centrecotton, Africa, Crop Production/Industries, Q13,

An Analysis of a Proposed New Economic Development Initiative

This report contains an analysis of a new economic development incentive that has been proposed as an addition to the existing BEST program. Report #8

Variation in membrane proteins of developmentally aberrant mutants in Dictyostelium mucoroides.

Introduction: Cellular slime molds of the genus Dictyostelium have attracted the interest of developmental biologists for many years. They are used extensively to investigate the factors controlling development in multicellular organisms. This is largely due to the unique growth and developmental characteristics which the dictyostelids exhibit. Unlike higher eukaryotes, in which cell growth and morphogenesis coincide and are often interdependent, the cellular slime molds possess distinct and separate growth and developmental phases. This greatly simplifies the study of developmental processes making the cellular slime molds valuable research organisms. Other factors which make the dictyostelids desirable research organisms are: l) They follow a simple developmental pattern when compared to higher eukaryotic organisms. Cell differentiation occurs from a single cell type, a free-living uninucleate myxamoeba, into two new cell types, stalk cells and spore cells. 2) Growth and development occurs rapidly when compared with other eukaryotes. Depending upon environmental conditions a mature cell population may be obtained in a few days. 3) Suitable environmental conditions for growth and development are relatively inexpensive and easy to provide. 4) Mutagenesis and cloning of individual strains is readily accomplished

The Disappearing State Corporate Income Tax

This paper examines alternative explanations for the decline over the past two decades in state corporate income taxes relative to the state economy. We employ a survey of state tax administrators, individual tax returns from Georgia and Utah, and panel data to explore the importance of tax policy, tax planning, and economic factors on the trend in state corporate taxes. We find that corporate tax planning and economic factors account for much of the relative decline and that state tax policy changes are important factors. However, federal tax changes had only a modest effect during this period. Working Paper 06-2

Incidence and Environmental Effects of Distortionary Subsidies

Government policies that are not intended to address environmental concerns can nonetheless distort prices and affect firms\u27 emissions. We present an analytical general equilibrium model to study the effect of distortionary subsidies on factor prices and on environmental outcomes. We model an output subsidy, a capital subsidy, relief from environmental regulation, and a direct cash subsidy. In exchange for receiving subsidies, firms must agree to a minimum level of labor employment. Each type of subsidy and the employment constraint create both output effects and substitution effects on input prices and emissions. We calibrate the model to the Chinese economy, where government involvement affects emissions from both state-owned enterprises and private firms. Variation in production substitution elasticities does not substantially affect input prices, but it does substantially affect emissions