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Trade Liberalisation between Asymmetric Countries with Environmentally Concerned Consumers

Author

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  • Giuseppe Francesco Gori

    () (Department of Economics, University of Bologna, Italy)

  • Luca Lambertini

    () (Department of Economics, University of Bologna, Italy; The Rimini Centre for Economic Analysis (RCEA), Italy)

Abstract

This paper investigates the impact of free trade on welfare in a two-country world modelled as an international Hotelling duopoly with quadratic transport costs and asymmetric countries, where a negative environmental externality is associated with the consumption of the good produced in the smaller country. Countries' relative sizes as well as the intensity of negative environmental externality affect potential welfare gains in trade liberalisation. In line with Lambertini (1997a) we show that, as long as no trade policy is undertaken by the government of the larger country, trade liberalisation is not feasible since the latter always loses from opening to trade. A subsidy policy in favour of the firm producing the clean good is, on the contrary, shown to give both countries the right incentives to liberalize trade. Allowing for redistributive transfers between countries further extends the parametric range for which trade liberalisation is feasible under the subsidy scheme. The alternative situation, in which the green firm is based in the larger country, is also briefly sketched to find that free trade does give rise to a global welfare increment with no need of accompanying trade policies.

Suggested Citation

  • Giuseppe Francesco Gori & Luca Lambertini, 2012. "Trade Liberalisation between Asymmetric Countries with Environmentally Concerned Consumers," Working Paper series 40_12, Rimini Centre for Economic Analysis.
  • Handle: RePEc:rim:rimwps:40_12
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    References listed on IDEAS

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    Cited by:

    1. Markusen, James R., 2012. "Per-Capita Income as a Determinant of International Trade and Environmental Policies," Discussion Papers 2013-06, Graduate School of Economics, Hitotsubashi University.
    2. repec:spr:envpol:v:20:y:2018:i:2:d:10.1007_s10018-017-0197-2 is not listed on IDEAS
    3. James R. Markusen, 2014. "Per-Capital Income as a Determinant of International Trade and Environment Policies," CESifo Working Paper Series 4618, CESifo Group Munich.

    More about this item

    Keywords

    International trade; geographical nation size; spatial competition; environmental externality;

    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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