Regulated Firms with Transboundary Pollution: Does International Competition Improve Efficiency?

Isabelle Péchoux and Jerome Pouyet

Journal of Public Economic Theory, 2003, vol. 5, issue 3, 499-525

Abstract: We consider a model of strategic trade and environmental policies with transboundary pollution. A regulated monopoly produces in each country and emits pollution. Under complete information, opening borders leads to a reallocation of the production from the large country to the small one. Total production increases, leading to an increase in the total level of pollution. The creation of a common market sometimes leads to a deterioration of total welfare. Under asymmetric information, the international competition generated by the common market decreases the informational rents of the firms, thereby reinforcing the potential gain to open markets to international competition.

Date: 2003
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