Dynamic Environmental Policy in Developing Countries with a Dual Economy

We study an intertemporal model of environmental policy in a developing country with a dual economy. This developing country's economy is distorted because, among other things, the government subsidizes the exports of the sector of the economy that does not pollute. We study the output and employment effects of three separate pollution taxes. These taxes incorporate different assumptions about the DC government's ability to commit to its stated policy. We delineate the taxes, we analyze the dependence of these taxes on the present distortion, and we specify the scenarios which call for an activist policy, irrespective of the length of time to which the government can commit to its stated policy. Among other things, our study demonstrates why some developing country governments may not be serious about pollution control policies