Abstract
The authors develop a two-country, two-firm intra-industry trade model. Each firm is operating at its home country and producing homogeneous goods to be consumed in both countries. Governments apply quantity restriction on pollution. Every individual country is affected from the pollution generated during the production process of its own firm. The model shows that efficiency in pollution abatement technology plays a crucial role on welfare maximizing effort of governments. A critical level of pollution abatement technology determines the preponderance of environmental misgivings in welfare maximizing behavior. The more efficient the firms in pollution abatement technology, the less stricter the governments will be in their policies to reduce negative environmental externalities
Highlights
Debates over globalization have been going on for decades
We constructed an intra-industry two-country type, leading for two-firm partial equilibrium model in which agents maximize their objective functions through a three-stage game
The model is studied under two scenarios, noncooperative and cooperative environmental policies
Summary
We develop an intra-industry type, two-country, twofirm model. Each country hosts one firm, which produces homogenous good to be consumed in both countries. It is assumed that each country has different production technologies Both markets are segmented and firms face different demand conditions in each market. Of home country’s firm is x; producing xh for its domestic demand and xf to respond the demand in the foreign country. It produces yh for home country’s demand and yf for its domestic demand. Marginal cost structure of firms is given as follows: kh = ch+ μ (θ – zh), kf = cf+ μ (θ – zf). In the first stage of our model, governments determine the pollution quota given the reaction functions of later stages and given the policy level of the other government. Firms determine their output level given the quota.
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