Tuesday 13
C4 - Environment IV
Chair: Jean-Marc Bourgeon
› 9:00 - 9:25 (25min)
› Room 005 - E. Jaques-Dalcroze
Environmental Regulation and Intra-Industry Trade
Meeta Keswani Mehra  1@  , Deepti Kohli  2, *@  
1 : Jawaharlal Nehru University  (JNU)  -  Website
New Delhi 110067 -  India
2 : Jawaharlal Nehru University  (JNU)
New Delhi 110067 -  India
* : Corresponding author

The paper analyzes the interactions between intra-industry trade (IIT) and the environment by extending the Krugman's model of monopolistic competition and trade. Both autarky and free trade equilibria are derived, where output, prices, number of varieties and pollution are determined endogenously. It is found that a unilateral increase in the exogenous environmental tax by a country leads to a fall in output, increase in number of varieties and fall in aggregate pollution in that country. With IIT, if Home is a net exporter, an increase in environmental stringency by Home leads to a fall in its export-competitiveness and output (scale effect), thus reducing its export demand and raising its import demand. Higher prices and lower cost of production induce entry of firms in the Home industry (selection effect), reducing its import demand. Consequently, the aggregate effect on imports remains ambiguous, and the first-order scale effect on exports dominates the second-order effect on imports implying a rise in Home's share of IIT in overall trade with Foreign. The opposite holds true in case Home is a net importer. The impact of a rise in environmental tax on aggregate welfare comprises the following effects: a fall in aggregate output (scale effect), rise in number of varieties (selection effect), lowering of aggregate pollution and rise in environmental tax revenue in autarky. With free trade, two additional effects -- changes in the level of exports and imports, also arise. The overall change in aggregate welfare, in both autarky and free trade remain ambiguous.

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