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

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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Publication Type:
Working Paper
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JEL Codes:
D43; F18; H23; Q58
Series Statement:
CREATE Working Papers

 Record created 2017-04-01, last modified 2017-04-04

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