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Abstract

The spread of infectious livestock diseases can be considered a form of “biological pollution.” Prior literature asserts trade-related biological pollution externalities arise from trade in contaminated goods. However, this literature ignores (i) importers’ ability to reduce disease spillovers via private risk management choices and (ii) the potential for strategic interactions to arise when an importer’s risk management measures simultaneously protect himself and others. This paper explores the design of efficient disease prevention policies when importers can mitigate disease risks to others. We demonstrate that the biological pollution externality extends beyond trade-related activities—in contrast to prior work—and derive efficient policy incentives to internalize the externality. We also find spillovers between importers may be characterized by strategic complementarities, leading to multiple Nash-equilibrium levels of risk-mitigating activities. Additional command-and-control policies may also be needed alongside priced-based incentives to achieve efficiency in this case.

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