Scandinavian Working Papers in Economics

Research Papers in Economics,
Stockholm University, Department of Economics

No 2013:8: Trade, Transboundary Pollution and Market Size

Rikard Forslid (), Toshihiro Okubo () and Mark Sanctuary ()
Additional contact information
Rikard Forslid: Dept. of Economics, Stockholm University, Postal: Department of Economics, Stockholm University, S-106 91 Stockholm, Sweden
Toshihiro Okubo: Keio University, Postal: Faculty of Economics, Keio University, Japan
Mark Sanctuary: Dept. of Economics, Stockholm University, Postal: Beijer Institute of Ecological Economics, IVL Swedish Environmental Research Institute, Department of Economics, Stockholm University, S-106 91 Stockholm, Sweden

Abstract: This paper uses a monopolistic competitive framework with many sectors to study the impact of trade liberalization on local and global emissions. We focus on the interplay of the pollution haven effect and the home market effect and show how a large-market advantage can counterbalance a high emission tax, implying that trade liberalization leads to lower global emissions. Generally, our results suggest that relative market size, the level of trade costs, the ease of abatement, and the degree of product differentiation at the sector level are relevant variables for empirical studies on trade and pollution.

Keywords: market size; emission tax; trade liberalization

JEL-codes: D21; F12; F15

15 pages, April 17, 2013

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