Dynamic environmental policy in developing countries with a dual economy
Abstract
We analyze a dynamic model of environmental policy in a stylized developing country (DC)
with a dual economy. This DC’s economy is distorted in part because the government subsidizes the
exports of the non-polluting sector of the economy. We analyze the employment and output effects
of three different pollution taxes. These taxes incorporate alternate assumptions about the DC
government’s ability to commit to its announced course of action. We describe the taxes, we examine
the dependence of these taxes on the extant distortion, and we stipulate the conditions which call for
an activist policy, irrespective of the length of time to which the government can commit to its
announced policy. Inter alia, our analysis shows why some DC governments may not be serious
about environmental protection.