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An Alternative Base Case for Modeling Trade and the Global Environment

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  • James R. Markusen

Abstract

The trade-and-environment literature concentrates on a generic base case, focused on the production side of general equilibrium, with consumption "neutralized" by assuming homothetic preferences. I offer a simple alternative base case, neutralizing the usual production features instead. I focus on the demand side of general equilibrium, introducing nonhomothetic preferences where environmental quality has an income elasticity of demand exceeding one. I contrast cooperative and noncooperative outcomes between two countries, showing that the poor country makes lower abatement efforts under either assumption. A poor country may be worse off when the large country abates (reversing the usual argument on free riding) and cooperative bargaining over abatement levels may offer no gains. I identify "policy leakage" and show that border taxes are counterproductive. Free trade is good for the environment for several reasons. Finally, I briefly examine "issue linking" in bargaining to assess the benefits of linking trade and environment negotiations.

Suggested Citation

  • James R. Markusen, 2017. "An Alternative Base Case for Modeling Trade and the Global Environment," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 4(3), pages 895-925.
  • Handle: RePEc:ucp:jaerec:doi:10.1086/693135
    DOI: 10.1086/693135
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    Cited by:

    1. Larch, Mario & Löning, Markus & Wanner, Joschka, 2018. "Can degrowth overcome the leakage problem of unilateral climate policy?," Ecological Economics, Elsevier, vol. 152(C), pages 118-130.

    More about this item

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F00 - International Economics - - General - - - General
    • F02 - International Economics - - General - - - International Economic Order and Integration
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

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