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Trade Structure, Transboundary Pollution and Multilateral Trade Liberalization: the Effects on Environmental Taxes and Welfare

  • Bruno Nkuiya
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    This paper considers a trade situation where the production activities of potentially heterogeneous countries generate pollution which can cross borders and harm the well-being of all the countries involved. In each of those countries the policy market levies pollution taxes on the polluting firms and a tariff on imports in order to correct that distortion. The purpose of the paper is to investigate the effect of a reduction in the tariff on equilibrium pollution taxes and welfare. The existing literature has investigated this problem for trade between two identical countries. This paper analyzes the problem in the more realistic context where countries are not necessarily identical and trade can be multilateral. It becomes possible to show what bias is introduced when those two realities are neglected. I find that a tariff reduction can actually lower output; it can also lower welfare even if pollution is purely local.

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    File URL: https://www.create.ulaval.ca/sites/create.ulaval.ca/files/Publications/create2012-8.pdf
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    Paper provided by CREATE in its series Cahiers de recherche CREATE with number 2012-8.

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    Date of creation: 2012
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    Handle: RePEc:lvl:creacr:2012-8
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    1. James Brander & Paul Krugman, 1980. "A "Reciprocal Dumping" Model of International Trade," Working Papers 405, Queen's University, Department of Economics.
    2. Burguet, Roberto & Sempere, Jaume, 2003. "Trade liberalization, environmental policy, and welfare," Journal of Environmental Economics and Management, Elsevier, vol. 46(1), pages 25-37, July.
    3. Soham Baksi & Amrita Ray chaudhuri, 2009. "On trade liberalization and transboundary pollution," Economics Bulletin, AccessEcon, vol. 29(4), pages 2605-2612.
    4. Barrett, Scott, 1994. "Strategic environmental policy and intrenational trade," Journal of Public Economics, Elsevier, vol. 54(3), pages 325-338, July.
    5. Markusen, James R., 1975. "International externalities and optimal tax structures," Journal of International Economics, Elsevier, vol. 5(1), pages 15-29, February.
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