Direct regulation of a mobile polluting firm

We compare noncooperative regional environmental policy to cooperative national policy for direct regulation of a mobile firm. The national government can always reach its first best with commitment, but not with time-consistent policy. With commitment, regional policy results in a game of chicken with too little output or in “not in my backyard”. Without commitment, regional policy may improve upon national policy. This happens when regional policy discourages the investment, whereas the welfare-reducing investment does take place with national policy