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A Dynamic Approach to the Environmental Effects of Trade Liberalization

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  • M. Fadaee

Abstract

In this paper, we develop a two-country world di¤erential game model with a polluting firm in each country where there is transportation cost to investigate the equilibrium of the game between firms when they decide to trade or not and to see under which conditions social welfare coincides with the market equilibrium. We find out that in the static game bilateral trade is always the equilibrium for any acceptable transportation cost while in the dynamic game social planner can prevent the inefficient outcome by imposing and determining the proper amount of Pigouvian taxation.

Suggested Citation

  • M. Fadaee, 2011. "A Dynamic Approach to the Environmental Effects of Trade Liberalization," Working Papers wp746, Dipartimento Scienze Economiche, Universita' di Bologna.
  • Handle: RePEc:bol:bodewp:wp746
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    More about this item

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • F18 - International Economics - - Trade - - - Trade and Environment
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

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