Environmental Standards, Wage Incomes and the Location of Polluting Firms

Abstract

The purpose of this paper is to study how the choice of environmental standards by governments is affected by the existence of wage incomes when firms' location is endogenous. In developed countries labor is unionized, which allows positive wage incomes to arise. Thus, each government has incentives to persuade firms to locate in its country since its social welfare depends on such incomes. But, as pollution damages the environment, each government will try to persuade polluting firms to locate in its country to obtain the wage incomes only when its valuation of environmental damage shows that it is low.