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Abstract

The paper employs a partial equilibrium model of international trade to derive optimal environmental policy responses to tariff reduction requirements and assesses the impact of such policies on social welfare. The domestically optimal policy adjustment for a large importing country committing itself to tariff reduction is to lower the environmental tax rate. Nevertheless, the distorting effect of a strategic environmental policy is generally smaller than that of an optimal tariff. The paper thereby suggests that strategic distortions of environmental policy will not undermine the standard policy proposition that trade liberalisation enhances global efficiency.

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