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The Effects of Choosing Free Trade on Endogenous Environmental Regulation and Welfare: A Model of Common Agency Government

  • Gulati, Sumeet

Several studies hypothesize exogeneous environmental regulation as the primary motive for trade between two regions, often predicting a lower welfare for the region with incomplete environmental protection. Such analyses do not allow the region to adjust its environmental policy in response to a shift in the trade regime. Further, they do not allow the region to refuse free trade in the face of a welfare loss. As an alternative I propose a common agency model of government to endogenize environmental policy and the choice of trade regime. Conditions for the incomplete internalization of an environmental externality are specified, and the pollution tax in autarky is compared to that under free trade. The paper finds that moving to free trade induces a tightening of pollution policy reducing the deadweight loss from incomplete environmental regulation. This improvement occurs regardless of any price changes that accompany free trade. In contrast to the predictions from earlier articles, the adoption of free trade increases aggregate welfare. This gain occurs even when the country with incomplete environmental protection exports the pollution intensive good.

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Paper provided by American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) in its series 2001 Annual meeting, August 5-8, Chicago, IL with number 20449.

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Date of creation: 2001
Date of revision:
Handle: RePEc:ags:aaea01:20449
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  1. Vukina, Tomislav & Beghin, John C. & Solakoglu, Ebru G., 1999. "Transition to markets and the environment: Effects of the change in the composition of manufacturing output," Environment and Development Economics, Cambridge University Press, vol. 4(04), pages 582-598, October.
  2. Gene M. Grossman & Elhanan Helpman, 1993. "The Politics of Free Trade Agreements," NBER Working Papers 4597, National Bureau of Economic Research, Inc.
  3. Revesz, Richard L. & Stavins, Robert N., 2007. "Environmental Law," Handbook of Law and Economics, Elsevier.
  4. Dixit, Avinash & Grossman, Gene M & Helpman, Elhanan, 1997. "Common Agency and Coordination: General Theory and Application to Government Policy Making," Journal of Political Economy, University of Chicago Press, vol. 105(4), pages 752-69, August.
  5. Werner Antweiler & Brian R. Copeland & M. Scott Taylor, 2001. "Is Free Trade Good for the Environment?," American Economic Review, American Economic Association, vol. 91(4), pages 877-908, September.
  6. Lopez, Ramon & Mitra, Siddhartha, 2000. "Corruption, Pollution, and the Kuznets Environment Curve," Journal of Environmental Economics and Management, Elsevier, vol. 40(2), pages 137-150, September.
  7. 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 617-47, August.
  8. James A. Brander & M. Scott Taylor, 1996. "Open Access Renewable Resources: Trade and Trade Policy in a Two-CountryModel," NBER Working Papers 5474, National Bureau of Economic Research, Inc.
  9. James A. Brander & M. Scott Taylor, 1995. "International Trade and Open Access Renewable Resources: The Small Open Economy Case," NBER Working Papers 5021, National Bureau of Economic Research, Inc.
  10. Hettige, Hemamala & Lucas, Robert E B & Wheeler, David, 1992. "The Toxic Intensity of Industrial Production: Global Patterns, Trends, and Trade Policy," American Economic Review, American Economic Association, vol. 82(2), pages 478-81, May.
  11. Fredriksson, Per G., 1997. "The Political Economy of Pollution Taxes in a Small Open Economy," Journal of Environmental Economics and Management, Elsevier, vol. 33(1), pages 44-58, May.
  12. Brander, James A. & Scott Taylor, M., 1997. "International trade between consumer and conservationist countries," Resource and Energy Economics, Elsevier, vol. 19(4), pages 267-297, November.
  13. Chichilnisky, Graciela, 1994. "North-South Trade and the Global Environment," American Economic Review, American Economic Association, vol. 84(4), pages 851-74, September.
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  15. Pinelopi Koujianou Goldbe & Giovanni Maggi, 1997. "Protection for Sale: An Empirical Investigation," NBER Working Papers 5942, National Bureau of Economic Research, Inc.
  16. Bommer, Rolf & Schulze, Gunther G., 1999. "Environmental improvement with trade liberalization," European Journal of Political Economy, Elsevier, vol. 15(4), pages 639-661, November.
  17. repec:tpr:qjecon:v:98:y:1983:i:3:p:371-400 is not listed on IDEAS
  18. McAusland, Carol, 2003. "Voting for pollution policy: the importance of income inequality and openness to trade," Journal of International Economics, Elsevier, vol. 61(2), pages 425-451, December.
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