ENVIRONMENTAL QUALITY AND THE GAINS FROM TRADE

Abstract

The paper analyzes the trade-off between environmental quality and the gains from trade. For a world with pollutants as a joint product of output it is shown that gains from trade by exporting a pollution-intensively produced commodity are accompanied by a loss of environmental quality and that improving environmental quality will adversely affect the gains from trade. The paper analyzes with a two sector model which adjustment processes occur, if a country untertakes environmental policy. The results are explained diagrammatically. A condition is specified for a positive change in welfare from environmental policy taking into consideration the reduction in the gains from trade. Finally, the paper suggests that in an open economy emission taxes have to be set according to the same rule as in a closed economy, namely in the optimum the emission tax must equal marginal environmental damage prevented.