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Strategic Environmental Policy and International Trade - The Role of Market Conduct

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  • Ulph, Alistair Mitchell

Abstract

In this paper I analyse the incentives for governments and producers to act strategically in imperfectly competitive markets when there is Bertrand competition. Strategic behaviour by governments takes the form of distortions to their environmental policy from the first-best rule of equating marginal damage and marginal abatement costs. Strategic behaviour by producers implies inefficient investment in R&D. I contrast the outcomes with Bertrand competition with those in Cournot competition, which I analysed in an earlier paper (Ulph (1993a)). The main findings are: when only governments act strategically, they will set too tough environmental policy and the distortion will be greater if governments use emission standards rather than emission taxes; both results are the opposite of what happened in Cournot competition. When only producers act strategically, they under-invest in R&D (in Cournot they over-invest), but it is not possible to give a universal ranking of policy instruments. When governments and producers act strategically, this reduces the extent of government distortion of environmental policy, which is the same result as with Cournot, but for very different reasons; when governments use emission taxes then with Bertrand competition they set taxes below the first-best level, the reverse of what happens when only governments act strategically.

Suggested Citation

  • Ulph, Alistair Mitchell, 1994. "Strategic Environmental Policy and International Trade - The Role of Market Conduct," CEPR Discussion Papers 1065, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:1065
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    Citations

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    Cited by:

    1. Ferrara, Ida & Missios, Paul & Murat Yildiz, Halis, 2009. "Trading rules and the environment: Does equal treatment lead to a cleaner world?," Journal of Environmental Economics and Management, Elsevier, vol. 58(2), pages 206-225, September.
    2. Benchekroun Hassan & Yildiz Halis Murat, 2011. "Free Trade, Autarky and the Sustainability of an International Environmental Agreement," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 11(1), pages 1-30, January.
    3. Rupayan Pal, 2012. "Delegation And Emission Tax In A Differentiated Oligopoly," Manchester School, University of Manchester, vol. 80(6), pages 650-670, December.
    4. Kenji Fujiwara, 2011. "Market Integration and Competition in Environmental and Trade Policies," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 49(4), pages 561-572, August.
    5. Li, Hong & Huang, Chengming & Yang, Bill Z., 2011. "Environmental Regulation, Business Innovation and International Competitiveness - Regolazione ambientale, innovazioni d’impresa e competitività internazionale," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 64(1), pages 115-128.
    6. Joachim Fünfgelt & Günther G. Schulze, 2011. "Endogenous Environmental Policy when Pollution is Transboundary," Working Paper Series in Economics 196, University of Lüneburg, Institute of Economics.
    7. Rupayan Pal & Bibhas Saha, 2010. "Does partial privatization improve the environment," Indira Gandhi Institute of Development Research, Mumbai Working Papers 2010-018, Indira Gandhi Institute of Development Research, Mumbai, India.
    8. Glebe, Thilo W. & Latacz-Lohmann, Uwe, 2004. "Agricultural Trade Liberalization And Strategic Environmental Policy: A Formal Analysis," 2004 Annual meeting, August 1-4, Denver, CO 20277, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    9. Alessio D’Amato & Edilio Valentini, 2011. "Enforcement and environmental quality in a decentralized emission trading system," Journal of Regulatory Economics, Springer, vol. 40(2), pages 141-159, October.
    10. Karen Palmer & Wallace E. Oates & Paul R. Portney, 1995. "Tightening Environmental Standards: The Benefit-Cost or the No-Cost Paradigm?," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 119-132, Fall.

    More about this item

    Keywords

    Environmental Policy; Imperfect Competition; International Trade; Market Conduct; Strategic Behaviour;

    JEL classification:

    • F12 - International Economics - - Trade - - - Models of Trade with Imperfect Competition and Scale Economies; Fragmentation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy

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