Scandinavian Working Papers in Economics

Umeå Economic Studies,
Umeå University, Department of Economics

No 754: Does Wage Bargaining Justify Environmental Policy Coordination?

Thomas Aronsson (), Lars Persson () and Tomas Sjögren ()
Additional contact information
Thomas Aronsson: Department of Economics, Umeå University, Postal: S 901 87 Umeå, Sweden
Lars Persson: Department of Economics, Umeå University, Postal: S 901 87 Umeå, Sweden
Tomas Sjögren: Department of Economics, Umeå University, Postal: S 901 87 Umeå, Sweden

Abstract: This paper analyzes the welfare consequences of coordinated tax reforms in an economy where a transboundary environmental externality and an international wage bargaining externality are operative at the same time. We assume that the wage in each country is decided upon in a bargain between trade-unions and firms, and the wage bargaining externality arises because the fall-back profit facing firms depends on the profit they can earn if moving production abroad. Using the noncooperative Nash equilibrium as a reference case, our results imply that the international wage bargaining externality may either reinforce or weaken the welfare gain of a coordinated increase in environmental taxation, depending on (among other things) how the reform affects the wage. For a special case, we also derive an exact condition under which a coordinated increase in the environmental tax leads to higher welfare.

Keywords: Environmental taxes; externalities; policy coordination; trade-unions

JEL-codes: H23; J51

26 pages, November 3, 2008

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