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Transboundary Pollution, Trade Liberalization, and Environmental Taxes

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  • Baksi, S.
  • Ray Chaudhuri, A.

    (Tilburg University, Center for Economic Research)

Abstract

In a bilateral trade framework, we examine the impact of tari¤ reduction on the op- timal pollution tax and social welfare when pollution is transboundary. Strategic considerations lead countries to distort their pollution tax in the non-cooperative equilibrium. Trade liberalization changes the distortion, and consequently the pol- lution tax and welfare, in ways that depend on the extent to which pollution is transboundary. We find that when the pollution damage parameter is sufficiently small (large), bilateral tariff reduction always decreases (increases) the pollution tax, irrespective of the value of the transboundary pollution parameter. However, when the pollution damage parameter takes intermediate values, bilateral tari¤ reduction decreases the pollution tax if and only if the transboundary pollution parameter is sufficiently large (or even sufficiently small, in certain cases). More- over, with pollution being transboundary, the impact of trade liberalization on welfare is non-monotonic and concave. The greater the extent to which pollution crosses borders, the more likely is trade liberalization to reduce welfare.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2008-78.

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Date of creation: 2008
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Handle: RePEc:dgr:kubcen:200878

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Web page: http://center.uvt.nl

Related research

Keywords: Transboundary pollution; Strategic trade; Bilateral tariff reduction; Pollution tax;

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  1. Burguet, Roberto & Sempere, Jaume, 2003. "Trade liberalization, environmental policy, and welfare," Journal of Environmental Economics and Management, Elsevier, vol. 46(1), pages 25-37, July.
  2. Copeland, Brian R. & Taylor, M. Scott, 1999. "Trade, spatial separation, and the environment," Journal of International Economics, Elsevier, vol. 47(1), pages 137-168, February.
  3. Werner Antweiler & Brian R. Copeland & M. Scott Taylor, 1998. "Is Free Trade Good for the Environment?," NBER Working Papers 6707, National Bureau of Economic Research, Inc.
  4. Josh Ederington & Jenny Minier, 2003. "Is environmental policy a secondary trade barrier? An empirical analysis," Canadian Journal of Economics, Canadian Economics Association, vol. 36(1), pages 137-154, February.
  5. Benarroch, Michael & Thille, Henry, 2001. "Transboundary pollution and the gains from trade," Journal of International Economics, Elsevier, vol. 55(1), pages 139-159, October.
  6. Kennedy Peter W., 1994. "Equilibrium Pollution Taxes in Open Economies with Imperfect Competition," Journal of Environmental Economics and Management, Elsevier, vol. 27(1), pages 49-63, July.
  7. Krutilla, Kerry, 1991. "Environmental regulation in an open economy," Journal of Environmental Economics and Management, Elsevier, vol. 20(2), pages 127-142, March.
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Cited by:
  1. Benchekroun Hassan & Yildiz Halis Murat, 2011. "Free Trade, Autarky and the Sustainability of an International Environmental Agreement," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 11(1), pages 1-30, January.
  2. Horn, Henrik, 2011. "The burden of proof in trade disputes and the environment," Journal of Environmental Economics and Management, Elsevier, vol. 62(1), pages 15-29, July.
  3. Horn, Henrik, 2009. "The Burden of Proof in National Treatment Disputes and the Environment," Working Paper Series 791, Research Institute of Industrial Economics.

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