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Trade, externalities, and the impact of asymmetric information on trade policy

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  • G. F. Gori
  • L. Lambertini

Abstract

This paper investigates the relationship between trade liberalisation, consumers' environmental awareness and a negative environmental externality in consumption. We adopt an international Hotelling duopoly setup, where firms are located in two asymmetric countries. We find that, if the intensity of environmental externality is common knowledge for country governments, this setup delivers no need of accompanying trade policies in order to enforce trade liberalisation. In the opposite case, in which information is asymmetric, i.e., the small country's Government cannot observe the positive enviromental effects of its firm's exports to foreign consumers, we find that: (i) the Pareto optimum is always enforced, since the brown country always relaxes the distortionary trade policy, and (ii) cheating on the environmental externality allows the brown country's government to extract extra surplus from the green country. Allowing for trade in green technology delivers opposite conclusions: the externality is minimised and welfare is maximised in equilibrium if information is symmetric while trade liberalisation with asymmetric information always entails a second best outcome.

Suggested Citation

  • G. F. Gori & L. Lambertini, 2014. "Trade, externalities, and the impact of asymmetric information on trade policy," Working Papers wp930, Dipartimento Scienze Economiche, Universita' di Bologna.
  • Handle: RePEc:bol:bodewp:wp930
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    References listed on IDEAS

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    1. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, November.
    2. Philippe Aghion & Nick Bloom & Richard Blundell & Rachel Griffith & Peter Howitt, 2005. "Competition and Innovation: an Inverted-U Relationship," The Quarterly Journal of Economics, Oxford University Press, vol. 120(2), pages 701-728.
    3. Varian, Hal R, 1982. "The Nonparametric Approach to Demand Analysis," Econometrica, Econometric Society, vol. 50(4), pages 945-973, July.
    4. R. Cellini & L. Lambertini, 2001. "Advertising in a Differential Oligopoly Game," Working Papers 427, Dipartimento Scienze Economiche, Universita' di Bologna.
    5. Aghion, Philippe & Akcigit, Ufuk & Howitt, Peter, 2014. "What Do We Learn From Schumpeterian Growth Theory?," Handbook of Economic Growth,in: Handbook of Economic Growth, edition 1, volume 2, chapter 0, pages 515-563 Elsevier.
    6. Cellini, Roberto & Lambertini, Luca, 2009. "Dynamic R&D with spillovers: Competition vs cooperation," Journal of Economic Dynamics and Control, Elsevier, vol. 33(3), pages 568-582, March.
    7. Varian, Hal R., 1990. "Goodness-of-fit in optimizing models," Journal of Econometrics, Elsevier, vol. 46(1-2), pages 125-140.
    8. R. Cellini & L. Lambertini, 2002. "Advertising with Spillover Effects in a Differential Oligopoly Game With Differentiated Goods," Working Papers 430, Dipartimento Scienze Economiche, Universita' di Bologna.
    9. repec:spr:joptap:v:116:y:2003:i:1:d:10.1023_a:1022158102252 is not listed on IDEAS
    10. Richard Gilbert, 2006. "Looking for Mr. Schumpeter: Where Are We in the Competition-Innovation Debate?," NBER Chapters,in: Innovation Policy and the Economy, Volume 6, pages 159-215 National Bureau of Economic Research, Inc.
    11. Cellini, Roberto & Lambertini, Luca, 2002. "A differential game approach to investment in product differentiation," Journal of Economic Dynamics and Control, Elsevier, vol. 27(1), pages 51-62, November.
    12. Hausman, Jerry A, 1981. "Exact Consumer's Surplus and Deadweight Loss," American Economic Review, American Economic Association, vol. 71(4), pages 662-676, September.
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    Cited by:

    1. Verico, Kiki & Natanael, Yeremia, 2018. "Let’s talk about the Free Trade Agreement (FTA): The five ASEAN members highlighting Indonesia," MPRA Paper 87947, University Library of Munich, Germany.

    More about this item

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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