Theoretical Mathematics & Applications

Decentralized Environmental Regulation in a Model with Increasing-Returns-to-Scale

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  • Abstract

     

    In economics, homothetic functions are generally used to represent production. Homogeneous production functions are a subset. A production function is homogeneous of degree a when all inputs are changed in the same proportion and resulting output changes by the ath power of the input change. Convention envisions homogeneity of degree 1, constant-returns-to-scale. Herein, we alter convention for increasing-returns-to-scale, a > 1. With aggregate increasing-returns-to-scale, symmetric regions, in a first-best Nash equilibrium, subsidize capital and overprotect the regional environment. Second-best fiscal structures are also examined.

     

    JEL Classification numbers: H20, H71, H73.

    Keywords: Environmental federalism, Inter-jurisdictional competition, Increasing-returns-to-scale, Homothetic functions.