Harmonization and Optimal Environmental Policy in a Federal System with Asymmetric Information

Should environmental policy be set at the federal level to counter incentives for “environmental dumping” when states act non-cooperatively? Assuming that environmental damage costs are known only by state governments, I ask whether this asymmetry of information could rationalize a federal government harmonizing environmental policies across states. I show that asymmetric information narrows the difference in environmental policies across states, relative to full information, but does not justify harmonization. The welfare loss from harmonization rises sharply with the variance in damage costs across states, and can erode the benefit of setting policy at the federal level to counter environmental dumping