30 Pages Posted: 8 Apr 2009
Date Written: December 1993
This paper studies a general equilibrium North-South economy consisting of two countries which produce and trade two goods using two inputs of production. lt extends the North-South trade model of Chichilnisky (1981. 1986) by assuming that one input of production is a renewable resource which follows its own physical dynamics. From these dynamics and from optimal extraction behavior we derive explicitly the supply of environmental inputs as a function of their market prices. Therefore this paper fully derives the price dependence of inputs which is postulated exogenously in the original North-South model. All markets for goods and for inputs are free and competitive throughout. We establish that different property regimes lead to different supply functions for environmental resources. When property rights are well defined (as in the North) the supply of environmental inputs is less price responsive than it is when property rights are ill defined (as in the South). Ill defined property rights lead to an apparent `abundance' of environmental resources in the south. We establish that the difference in property rights in two otherwise identical regions (the same technologies. preferences. and endowments) is itself sufficient to explain why the two regions trade. The region with ill defined property rights exports the environmentally intensive good. This leads to overuse of the environment worldwide and to lower market prices of environmentally intensive goods. The difference in property rights of the two regions determines an apparent 'comparative advantage' in the export of environmentally intensive goods in the South, even when the two countries are identical and therefore there is no real comparative advantages. The difference in property rights also gives rise to 'apparent' gains from trade, even when there are no real gains from trade.
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