Trade in Secondhand Goods, Monitoring of Illegal Trade, and Import Quotas on Legal Trade

This paper examines the monitoring of illegal trade, and restrictions on the legal trade, of secondhand goods. We assume that the home (foreign) country exports (imports) secondhand goods both legally and illegally. We demonstrate that when the trade restriction is nonbinding, and part of the legally imported goods serve not as secondhand but as materials, an increase in the probability of monitoring may increase expected foreign environmental damage. In contrast, when the trade restriction is binding, if part of the legal imports is resold for material use, a stricter trade restriction decreases expected foreign environmental damage. We also demonstrate that when governments noncooperatively select monitoring probabilities, the probability of foreign monitoring is necessarily higher than in the second-best situation. In this case, a commitment by the home government to its monitoring probability improves welfare in both countries, and this commitment arises in the extended game in which both governments choose the timing of the move in the first stage and the monitoring probabilities in the second stage. Moreover, when the foreign government chooses the level of the import quota on legal imports, it is possible that the foreign trade restriction is stricter than the second-best level. In such a case, any commitment by either government cannot simultaneously improve the welfare of both countries.