Transboundary Pollution, Trade Liberalization and Environmental Taxes
AbstractIn a bilateral trade framework, we examine the impact of tariff reduction on the optimal 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 pollution 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 tariff reduction decreases the pollution tax if and only if the transboundary pollution parameter is sufficiently large (or even sufficiently small, in certain cases). Moreover, 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 InfoPaper provided by Tilburg University, Tilburg Law and Economic Center in its series Discussion Paper with number 2008-033.
Date of creation: 2008
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Transboundary pollution; Strategic trade; Bilateral tariff reduction; Pollution tax;
Other versions of this item:
- Baksi, S. & Ray Chaudhuri, A., 2008. "Transboundary Pollution, Trade Liberalization, and Environmental Taxes," Discussion Paper 2008-78, Tilburg University, Center for Economic Research.
- F18 - International Economics - - Trade - - - Trade and Environment
- Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
- H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
- D43 - Microeconomics - - Market Structure and Pricing - - - Oligopoly and Other Forms of Market Imperfection
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