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Environmental regulation and love for variety

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  • Luciana Echazu
  • Martin Heintzelman

Abstract

Using a model of monopolistic competition, we examine the relationship between intra‐industry trade and environmental regulation. The decisions on emission standards set by each country show strong strategic interactions. In closed economies regulations act as strategic substitutes, and in equilibrium there is under‐regulation relative to the cooperative outcome. Trade liberalization may lead to stricter or laxer environmental standards, depending on the consumers’ preference for product variety. In addition, we show that with open trade environmental regulations may act as strategic complements and countries may set environmental standards that are as strict (or stricter) than those in the cooperative outcome.

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  • Luciana Echazu & Martin Heintzelman, 2019. "Environmental regulation and love for variety," Review of International Economics, Wiley Blackwell, vol. 27(1), pages 413-430, February.
    • Handle: RePEc:bla:reviec:v:27:y:2019:i:1:p:413-430
    DOI: 10.1111/roie.12382
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