By John Lockyer
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Consequently, the total amount of production increases in an open economy. Since quantities and emissions are imperfect complements, the large (respectively small) country reduces (respectively increases) its emissions and the total amount of pollution generated increases15. 14 In our model, the reallocation effect depends on the difference between marginal costs of production, which in turn depends only on the difference between production levels and on the complementarity between production and pollution.
Then, we introduce a supra-national agency, which is in charge of the environmental policies and maximizes total welfare, while trade policies remain under the jurisdiction of national regulators. Obviously, centralization of emission levels improves total welfare since, now, the social damage cost of pollution is perfectly internalized. However, under a common market, the choice of environmental policies pushes further up the reallocation effect. In the end, even though total welfare is increased, the large country loses more and the small one gains more when environmental policies are centralized.
A. (1994), Environmental Taxation and the Double-dividend: The role of factor substitution and capital mobility. In: C. Carraro and D. ) Environmental Fiscal Reform and Unemployment. Dordrecht: Kluwer Academic publishers, (3-52). R. (1994), International Trade and the Environment: Policy Reform in a Polluted Small Open Economy, Journal of Environmental Economics and Management, 26, 44-65. H. (1995), Environmental Taxation and the Double Dividend: a Reader's Guide, International Tax and Public Finance, 2, 157-183.
