Global Externalities, Local Policies, and Firm Selection

Abstract How to fight global problems with local tools? When only firms know what externality-producing activities can be relocated, policies shape the location distribution of firm types different social values. We find that, because this selection effect, optimal confront firms’ mobility elevated corrective externality prices, in contrast common remedies for relocation risk. Our mechanism incentivizes also moving limit externality, and it influences strategically that comply elsewhere. The magnitude these effects is illustrated by a quantification key sectors EU emissions trading system.