Extensions Regarding Welfare

In the last two chapters, it was discussed how local governments which are interested only in the net income of “their” local resources may arrange public policy towards mobile and immobile industries. This relied on the observation that the consumers of outputs and the owners of industries often do not live at the places of production such that local governments at the places of production may not feel responsible for output prices and profits. Nevertheless, it may happen that products are consumed locally and that industries are owned locally. Moreover, it may be that production causes positive or negative, local or global externalities. Accordingly, it is the purpose of this chapter to investigate in which way the policy implications of the basic model may change if local governments take these additional elements of welfare into account. There are especially the following questions: Is there still an incentive for a local government to favour a mobile industry compared to immobile industries if the mobile industry produces for the world market and the immobile industries produce for the local market? Should a differential in the pollution intensities of mobile and immobile industries be completely or partly internalized via an adjustment of the relative subsidization of the industries? Is there always an incentive to engage in ecological dumping in view of mobile industries? Can a high environmental standard help to attract mobile industries?