Gains from trade and environmental policy under imperfect competition and pollution from transport

Abstract

The relationship between the environment and international trade has been investigated in the framework of several international trade models that have been extended to contain the factor environmental pollution. The Ricardian trade model has been used by Pethig (1976) and the Heckscher-Ohlin model has been used in different ways by Pethig (1976), McGuire (1982) and Merrifield (1988). Conrad (1993) applied the Cournot-Brander-Spencer model and Markusen, Morey and Olewiler (1993) have applied the Horstmann-Markusen model. In this paper we apply the Chamberlin-Krugman model. We analyze the environmental transport costs of international trade and illustrate how they reduce the conventional gains from trade if their is no environmental policy reducing pollution in the trading countries. The motivation stems from the fact that in economic theory pollution is assumed to come from production, consumption or the use of capital. However, it is commonly pointed out in the business press that one of the largest users of energy is transport, which is using roughly one third of energy in the OECD as industry and residential/commercial does. However, the share of transport is increasing, whereas that of the other two users is decreasing. On average, international transportation requires larger travel distances than national transportation. International trade therefore inevitably contributes to pollution because it increases energy use. Pollution from transport, however, has not been analyzed in the literature on international trade and the environment. Moreover, we analyze the effects of technical progress and environmental taxes on prices of goods and pollution. We do so from the point of view of a market approach to