An Alternative Base Case for Modeling Trade and the Global Environment

James Markusen

Chapter 13 in Broadening Trade Theory:Incorporating Market Realities into Traditional Models, 2021, pp 269-299 from World Scientific Publishing Co. Pte. Ltd.

Abstract: The trade-and-environment literature concentrates on a generic base case, focused on the production side of general equilibrium, with consumption “neutralized” by assuming homothetic preferences. I offer a simple alternative base case, neutralizing the usual production features instead. I focus on the demand side of general equilibrium, introducing nonhomothetic preferences where environmental quality has an income elasticity of demand exceeding one. I contrast cooperative and noncooperative outcomes between two countries, showing that the poor country makes lower abatement efforts under either assumption. A poor country may be worse off when the large country abates (reversing the usual argument on free riding) and cooperative bargaining over abatement levels may offer no gains. I identify “policy leakage” and show that border taxes are counterproductive. Free trade is good for the environment for several reasons. Finally, I briefly examine “issue linking” in bargaining to assess the benefits of linking trade and environment negotiations.

Keywords: Multinational Firms; Horizontal Multinationals; Vertical Multinationals; Internalization; Vertical Integration; Outsourcing; Foreign Affiliates; Per-Capita Income; Non-homothetic Preferences; Income Elasticity of Demand; Missing Trade Puzzle; Skill Premium Puzzle; Pro-competitive Gains From Trade; Complements; Externalities (search for similar items in EconPapers)
JEL-codes: F00 F02 F13 F41 F43 (search for similar items in EconPapers)
Date: 2021
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Journal Article: An Alternative Base Case for Modeling Trade and the Global Environment (2017)
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