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Stringent environmental taxes in high-income countries are assumed to drive dirty industries to low-income countries, but the empirical evidence for ``pollution havens" is surprisingly weak. We demonstrate that a government trying to prevent flight by a ``dirty" durable good monopolist can impose an effluent tax that is offset by a lump-sum subsidy so that both firm profits and host-country welfare are increased.  The scheme exploits the Coase Conjecture insight: a durable goods monopolist has a time-consistency dilemma that limits its ability to restrict future output. In this environment the effluent tax provides a credible commitment that restricts future supply.  We assert that the use of lump-sum subsidies in strategic location competition is consistent with this mechanism, and this paradigm may be an important piece of the ``pollution haven paradox."

The Pollution Haven Paradox: Can an Effluent Tax Improve both Profits and Welfare?