Trade liberalization and transboundary pollution in an international mixed duopoly

Abstract

This study envisages the reciprocal markets in a mixed duopoly, in which a public firm located in its home country competes with a private firm located in another country. We examined environmental damage and the effects of trade liberalization on environmental taxes in the mixed duopoly model. In an international mixed duopoly with transboundary pollution, we found that environmental taxes levied by each country with different equity-structure firms are greater or less than the standard Pigouvian level, which depends on cost difference between the public and private firms. In addition, in this reciprocal trade market with transboundary pollution, a bilateral reduction in tariffs is beneficial to the global environment, but its impact on welfare is ambiguous. The larger the market scale and the smaller the cost differential between the public and private firm, the more likely it is that bilateral trade liberalization is only beneficial for the country with the public firm and not for the country with the private firm.