Per-Capita Income as a Determinant of International Trade and Environmental Policies

40 Pages Posted: 20 Feb 2014

See all articles by James R. Markusen

James R. Markusen

University of Colorado at Boulder - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

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Date Written: January 31, 2014

Abstract

International trade policy analysis has tended to focus on the production side of general equilibrium, with policies such as a tariff or carbon tax affecting international and internal income distributions through a Heckscher-Ohlin nexus of factor intensities and factor endowments. Here I move away from this structure to focus on demand, preferences, and endogenous policies set in a cooperative or non-cooperative manner. The specific context I choose is an international environmental externality such as carbon emissions, and I assume a high income elasticity of demand for environmental quality. I analyze how per-capita income levels of and differences between two countries affect their abatement efforts in a non-cooperative policy-setting game. This outcome can then be used as a disagreement point to analyze cooperative Nash bargaining. In both outcomes, the poor country makes a lower abatement effort in equilibrium; indeed, it may make none at all and cooperative bargaining with only abatement levels as an instrument may offer no gains. Other features include a novel terms-of-trade externality in which an abating country passes on a part of its abatement cost to its trading partner, in which case the non-cooperative and cooperative outcomes are identical under special symmetry assumptions. When per-capita income differences are large, the poor country may be worse off when the rich country abates. Finally, I examine “issue linking” in international bargaining, in which one country is both large and rich, and hence has both a high tariff and a high abatement effort in a non-cooperative equilibrium.

Keywords: trade and environment, per-capita income, environmental policy

JEL Classification: F000, F180, F210, Q560

Suggested Citation

Markusen, James R., Per-Capita Income as a Determinant of International Trade and Environmental Policies (January 31, 2014). CESifo Working Paper Series No. 4618. Available at SSRN: https://ssrn.com/abstract=2398298

James R. Markusen (Contact Author)

University of Colorado at Boulder - Department of Economics ( email )

Campus Box 256
Boulder, CO 80309
United States
303-492-0748 (Phone)
303-492-8960 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
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