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The long-run effects of environmental reform in open economies

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  • Karp, Larry
  • Zhao, Jinhua
  • Sacheti, Sandeep

Abstract

We compare the short-run and long-run effects of environmental reform and harmonization under autarky and free trade. When trade is driven by environmental distortions rather than real relative advantages, harmonization of environmental policies, even if achieved by lowering standards in one country, can improve short-run aggregate welfare. With the possibility of multiple steady states, long-run considerations favor a \race to the top" rather than a \race to the bottom" even when upward and downward harmonizations are equivalent in the short run. For a country trapped in a low (or bad) steady state, environmental reform may not move it to a high (or good) steady state under autarky. However, under trade, harmonization of policies may enable this country to reach the high steady state. Conversely, reforms that increase the relative differences in distortions may, under trade, cause economies to move toalow steady state.
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Suggested Citation

  • Karp, Larry & Zhao, Jinhua & Sacheti, Sandeep, 2003. "The long-run effects of environmental reform in open economies," Journal of Environmental Economics and Management, Elsevier, vol. 45(2), pages 246-264, March.
  • Handle: RePEc:eee:jeeman:v:45:y:2003:i:2:p:246-264
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    References listed on IDEAS

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    1. Karp, Larry & Sacheti, Sandeep & Zhao, Jinhua, 2001. "Common Ground between Free-Traders and Environmentalists," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(3), pages 617-647, August.
    2. Brander, James A. & Scott Taylor, M., 1998. "Open access renewable resources: Trade and trade policy in a two-country model," Journal of International Economics, Elsevier, vol. 44(2), pages 181-209, April.
    3. James A. Brander & M. Scott Taylor, 1997. "International Trade and Open-Access Renewable Resources: The Small Open Economy Case," Canadian Journal of Economics, Canadian Economics Association, vol. 30(3), pages 526-552, August.
    4. Alan M. Rugman & John J. Kirton & Julie A. Soloway (ed.), 0. "Trade and the Environment," Books, Edward Elgar Publishing, number 1339, April.
    5. Eswaran, Mukesh & Kotwal, Ashok, 1993. "A theory of real wage growth in LDCs," Journal of Development Economics, Elsevier, vol. 42(2), pages 243-269, December.
    6. Copeland, Brian R & Taylor, M Scott, 1995. "Trade and Transboundary Pollution," American Economic Review, American Economic Association, vol. 85(4), pages 716-737, September.
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    Cited by:

    1. Karp, Larry, 2005. "Property rights, mobile capital, and comparative advantage," Journal of Development Economics, Elsevier, vol. 77(2), pages 367-387, August.
    2. Barbier, Edward B. & Bulte, Erwin H., 2004. "Introduction to the symposium on trade, renewable resources and biodiversity," Journal of Environmental Economics and Management, Elsevier, vol. 48(2), pages 883-890, September.

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