Abstract
The literature on strategic environmental policy has not fully addressed welfare effects of trade liberalization from autarky. In a reciprocal market model of duopoly with transboundary pollution, we study how reductions in transport costs and import tariffs affect the Nash-equilibrium welfare of an environmental policy game as compared to any initial state including autarky. We show three patterns of gainfulness of trade depending on the interaction between marginal damage from pollution and the degree of transboundary pollution.
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