From Autarky to Free Trade: The Impact on Environment

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Working paper
Shlomo Weber and Hans Wiesmeth
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We consider a model with two countries, two commodities and production factors, labour and environment. The countries first choose their environmental standards and then the equilibrium market allocations are determined. We study a subgame perfect Nash equilibrium of this game for two types of environmental problems: regional and international. We examine effects resulting from the transition from autarky to free trade and show that regulating interference with supply and demand may have a positive effect on environmental standards. In particular, a transfer of commodity from one country to the other can increase welfare and raise environmental standards in both countries.
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