Abstract
Recent empirics suggest the relevance of transport cost reductions for world trade growth along with eliminations in protectionist trade barriers. To address the welfare effects of trade cost reductions in a context of ‘trade and the environment,’ we develop a two-stage game model where governments choose environmental and trade policies and firms play a Cournot-Nash game. We show that reductions in transport costs lead to lower emission taxes and higher tariffs. And, we find that the degree of pollution damage plays a central role in whether market integration is welfare-improving relative to autarky.
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