Environmental policy-making in a federal system and the use of unfunded mandates

Date of Completion

January 1996


Economics, Theory|Political Science, Public Administration|Environmental Sciences




State and local officials see unfunded mandates as a major cause of recent fiscal problems. Many environmental mandates have been cited as particularly burdensome at the local level. The two major issues of unfunded mandates are "funding" and "mandates." Which level of government should make regulatory decisions? Which level of government should pay for the costs of implementation?^ This dissertation presents a study of intergovernmental regulatory/funding relationships. The study develops a general equilibrium model and simulation models that allow a comparison of these institutional forms. The aim is to evaluate the efficiency of unfunded mandates when problems of interstate competition, interjurisdictional externalities, and heterogeneity across states exist.^ The major findings are as follows: In the context of interjurisdictional externalities, the use of federal mandates is generally preferred to state-level decision-making regardless of whether they are funded or unfunded. However, if state governments can allocate their budgets among different public goods, the use of federal mandates can achieve the first-best outcome in the presence of interjurisdictional externalities but not in the presence of interstate competition. The existence of tax competition implies that the state government will respond to the mandates by reducing the amounts of other public goods. Fearing these reactions by state governments, the federal government tends to set the level of the mandate too low. Under the specification used in the simulation, the use of funded mandates is preferred to the use of unfunded mandates since federal funding can reduce the tax competition at the state level by imposing a uniform federal tax.^ If states are heterogeneous but that there are no problems of interstate competition and interjurisdictional externality, state-level decision-making can achieve the efficient allocation of public and private goods within the states, but not an efficient allocation of capital. However, uniform federal standards fail to account for heterogeneity. The choice between federal and state decision making thus depends on the tradeoff between these two distortions. In the simulations, when the federal government uses uniform mandates for heterogeneous states, unfunded mandates are preferred to funded mandates due to the income redistribution effect. ^