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Trade Liberalisation between Asymmetric Countries with Environmentally Concerned Consumers

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  • Giuseppe Francesco Gori

    () (Department of Economics, University of Bologna, Italy)

  • Luca Lambertini

    () (Department of Economics, University of Bologna, Italy; The Rimini Centre for Economic Analysis (RCEA), Italy)

Abstract

This paper investigates the impact of free trade on welfare in a two-country world modelled as an international Hotelling duopoly with quadratic transport costs and asymmetric countries, where a negative environmental externality is associated with the consumption of the good produced in the smaller country. Countries' relative sizes as well as the intensity of negative environmental externality affect potential welfare gains in trade liberalisation. In line with Lambertini (1997a) we show that, as long as no trade policy is undertaken by the government of the larger country, trade liberalisation is not feasible since the latter always loses from opening to trade. A subsidy policy in favour of the firm producing the clean good is, on the contrary, shown to give both countries the right incentives to liberalize trade. Allowing for redistributive transfers between countries further extends the parametric range for which trade liberalisation is feasible under the subsidy scheme. The alternative situation, in which the green firm is based in the larger country, is also briefly sketched to find that free trade does give rise to a global welfare increment with no need of accompanying trade policies.

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Bibliographic Info

Paper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 40_12.

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Date of creation: Jun 2012
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Handle: RePEc:rim:rimwps:40_12

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Keywords: International trade; geographical nation size; spatial competition; environmental externality;

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  1. Kenji Fujiwara, 2009. "Why Environmentalists Resist Trade Liberalization," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 44(1), pages 71-84, September.
  2. Espínola-Arredondo, Ana & Zhao, Huan, 2012. "Environmental policy in a linear city model of product differentiation," Environment and Development Economics, Cambridge University Press, vol. 17(04), pages 461-477, August.
  3. Gerhard Clemenz, 2010. "Eco-Labeling and Horizontal Product Differentiation," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 45(4), pages 481-497, April.
  4. McAusland, Carol, 2008. "Trade, politics, and the environment: Tailpipe vs. smokestack," Journal of Environmental Economics and Management, Elsevier, vol. 55(1), pages 52-71, January.
  5. J. Peter Neary, 2000. "International Trade and the Environment - Theoretical and Policy Linkages," Working Papers 200018, School Of Economics, University College Dublin.
  6. José Moraga-González & Noemi Padrón-Fumero, 2002. "Environmental Policy in a Green Market," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 22(3), pages 419-447, July.
  7. Stephen P. Holland, 2009. "Taxes and Trading versus Intensity Standards: Second-Best Environmental Policies with Incomplete Regulation (Leakage) or Market Power," NBER Working Papers 15262, National Bureau of Economic Research, Inc.
  8. Copeland, Brian R. & Taylor, M. Scott, 2005. "Free trade and global warming: a trade theory view of the Kyoto protocol," Journal of Environmental Economics and Management, Elsevier, vol. 49(2), pages 205-234, March.
  9. Bansal, Sangeeta & Gangopadhyay, Shubhashis, 2003. "Tax/subsidy policies in the presence of environmentally aware consumers," Journal of Environmental Economics and Management, Elsevier, vol. 45(2, Supple), pages 333-355, March.
  10. Shachmurove, Yochanan & Spiegel, Uriel, 1995. "On Nations' Size and Transportation Costs," Review of International Economics, Wiley Blackwell, vol. 3(2), pages 235-43, June.
  11. Alexander Haupt, 2006. "Environmental Policy in Open Economies and Monopolistic Competition," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 33(2), pages 143-167, 02.
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