Trade liberalisation between Asymmetric Countries with Environmentally Concerned Consumers

Gori, Giuseppe Francesco ; Lambertini, Luca (2012) Trade liberalisation between Asymmetric Countries with Environmentally Concerned Consumers. Bologna: Dipartimento di Scienze economiche DSE, p. 27. DOI 10.6092/unibo/amsacta/4192. In: Quaderni - Working Paper DSE (824). ISSN 2282-6483.
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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 of 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.

Document type
Monograph (Working Paper)
Gori, Giuseppe Francesco
Lambertini, Luca
International trade, geographical nation size, spatial competition, environmental externality
Deposit date
19 Mar 2015 09:02
Last modified
31 Mar 2015 13:29

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