Plant location, wind direction and pollution policy under offshoring

Abstract

We examine pollution policy in a unified three-country framework, with the country in the middle playing double roles as both a polluter and a victim. We find that government preference over profits and consumer surplus to be important and so is environmentalism. In particular, the most downwind country has the least incentives to control pollution. Under oligopoly, several additional undesirable scenarios may arise, due to the interaction between wind direction and the incentive trade-offs in rent-shifting and pollution control. We analyse the mechanisms behind and provide policy guidance.