M . Ozgur Strategic Environmental Policies and Mergers

In the second half of the last century the attitude with respect to foreign investment has changed, and the role of this investment on development of Latin-American economies has become crucial. A fierce competition is taking place among these countries in a even more integrated region where environmental policies have become one of the suitable instruments to manage the perturbations on welfare caused by the change in foreign investment and specifically the perturbations caused by international mergers. According to this fact, we analyze environmental policies in the presence of mergers. Using a reciprocal dumping model with unemployment and foreign direct investment, we analyze the setting of pollution quota and pollution tax. Both policy instruments seem equivalent and depend on the marginal pollution disutility and the abatement pollution cost, the strictest and the weakest policy is used according to the magnitude of the two mentioned parameters. However, this equivalence is apparent as pollution tax is no continuous and the intuition behind is different in both cases. As a second result, we analyze the effect of a local merger on the welfare and the response of the government through these policy instruments. A merger in both cases will affect the welfare negatively and the response of the government is to compensate the monopolistic distortion strengthening the pollution policy. However it is possible if and only if the marginal pollution disutility is small. JEL Classification: F2, H2