Environmental Protection and the Private Provision of International Public Goods

Abstract

International environmental protection like the combat of global warming exhibits properties of public goods. In the international arena, no coercive authority exists that can enforce measures to overcome free‐rider incentives. Therefore decentralized negotiations between individual regions serve as an approach to pursue efficient international environmental protection. We propose a scheme which is based on the ideas of Coasean negotiations and Pigouvian taxes. The negotiating entities offer side‐payments to counterparts in order to influence their taxation of polluting consumption. Side‐payments, in turn, are self‐financed by means of externality‐correcting taxes. As we show, a Pareto‐efficient outcome can be attained.