Pollution Haven Models of International Trade

1
Pollution Haven Models of International Trade
2
Pollution Havens
5.1

• Poor countries forced to produce the dirty
  goods for the rich countries
• Rich countries avoid dirty production by
  importing dirty goods from poor countries
• Mechanism
• trade pattern
• differences in production costs
• differences in environmental regulation
• differences in income

5.2, 5.3
5.4, 5.5
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Modelling
5.1

• Two region model North versus South ()
• Each region many small identical countries
• North imports dirty good (m gt 0)
• South exports dirty good (m lt 0)
• Use results of previous chapter to see what
  happens if N and S open up to trade.
• To be sorted out
• Comparative advantage why does N import?
• Does trade raise world pollution level?

4
Comparative Advantage
5.2

• Suppose ? gt ?, but preferences, technology and
  endowments the same in N and S
• We now show that North will import
• Relative demand
• Relative supply
• Market clearing

5
Goods market equilibrium
5.2

• Insert Figure 5.2
• Autarky
• Free trade
• The diagram is central to this chapter
• 5.2 ? gt ? (exog) -- diagram -- North imports
• 5.3 z lt z (exog) -- ? gt ? -- diagram -- N
  imports
• 5.4 K gt K -- ? gt ? -- diagram -- N imports

6
Efficient policy
5.4

• Assume K/LK/L but K?KgtK
• Policy rule
• ? 1 gives policy in South
• ? gt 1 gives policy in North
• MD and Gz shift up if ? rises, so ? gt ?
• So again, North imports X (RS/RD diagram)

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World pollution level
5.5

• Trade -- z falls, but z rises -- world z?
• Special case that allows exact results
• Cobb Douglas demand constant
• linear disutility of z
• CRRA blue welfare
• usual production structure
• define (book ?)
• define
• Efficient policy
• World market clearing
• only with free trade of course

8
World pollution level
5.5

• Efficient policy
• Trade liberalisation
• changes (scale technique effect)
• sx changes (world composition effect)
• decompose change in world pollution when opening
  up to trade

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Decomposition
5.5

• Simplify notation
• autarky up to time t ? 1, trade starts at t
• Decomposition rule (discrete change!)
• rewrite
• autarky market clearing
• trade world market clearing
• we find and

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Decomposition
5.5

• scale techn effect
• total sign depends on sign (1??)
• composition effect always positive
• X-production is shifted to country with higher
  pollution intensity

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Asymmetric Policy
5.6.1

• Suppose North regulates but South does not
• North and South are the same in all other
  respects
• Distinguish
• marginal policy reform
• start from no intervention and free trade
• introduce small tax in North
• discrete policy reform
• start from efficient tax in North, no tax in
  South, no trade
• open up to free trade

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Marginal policy reform
5.6.1

• start from no intervention and free trade
• so e e 1
• Note m m 0
• North reduces (marginally) z
• so dz gt 0, dz lt 0
• Marginal welfare change
• North gains, South loses

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Jump to Free Trade
5.6.2

• Assume North always sets efficient environmental
  policy
• South no environmental policy
• Compare no trade to free trade
• We will show that South might gain, even if North
  and South identical otherwise
• of course South gains if it has no harm from
  pollution
• note just one (specific) example suffices
• Intuition gains from trade outweigh loss from
  increased pollution

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A Ricardian Model
5.6.2

• Assumptions
• Labour only (Ricardian)
• Cobb Douglas Demand
• Logarithmic utility
• Book imposes symmetry L L

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Autarky in South
5.6.2

• e 1 so x Lx z
• firms

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Autarky in South
5.6.2
Y
(1-b)L
X
bL
bL
Z
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Autarky in North
5.6.2

• Efficient policy
• profit maximization
• consumer demand
• firms
• Use production function and demand to solve for p

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Autarky in North
5.6.2
Y
(1-b)L
Comparing North to South amounts to increase in
tax
X
bL
bL
Z
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Free Trade
5.6.2

• We expect
• Impossible that both goods are produced in both
  regions at least one country fully specializes
• if p gt 1, y 0
• if both regions produce y w w 1, but then
  cost x in North is higher than in South, so x 0

Inequality if zero production
1 in South and North
1 in South, but lt1 in North
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South produces only X
5.6.2

• Assume p gt 1 (check later) so y 0
• Assume x gt 0 (check later, requires large b)
• Focus on welfare in South higher than in
  autarky?
• Production y 0, x L z, G pL
• Consumption use trade balance

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Free Trade Equilibrium South
5.6.2
Y
(1-b)L
X
bL
bL
Z
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Welfare comparison
5.6.2

• South gains from trade if
• So we need to solve for equilibrium world price,
  which takes a while...

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World price
5.6.2

• Implicit function
• if p pA, LHS gt 1
• LHS increases in p
• unique equilibrium

LHS
RHS
1
p
pA
1
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What makes South gain

• if L L, LHS decreases in b
• so high b means high p
• South gains more from specialising in X if demand
  for X is higher
• LHS increases L/L
• so small L/L means high p
• South gains more if it gets access to a large
  trading area