Environment: International trade and growth. 1. Optimal pollution tax under imperfect competition and international trade: The small country case. 2. Growth, trade, and environmental quality in a small open economy

The first examination depicts the possibility of setting up an optimal pollution tax under non-competitive markets and international trade in a developing country. The model employed describes a situation of partial equilibrium characterized by imperfect competition among domestic producers. The domestic good is a substitute for an imported pollution-intensive commodity, where the existence of an ad-valorem tariff in the import market generates a trade distortion. In this framework, we also introduce the possibility that both the government and the domestic firms act strategically, where the strategic variable for domestic producers is their investment in R&D. From the results, the optimal pollution policy under domestic distortions can be expressed as a function of a “domestic production effect”, a “trade effect”, and a “pollution effect”. The first captures the change in welfare coming from a change in domestic firms sales. The second is associated to the change in welfare coming from a change in the level of trade. Finally, the third captures the change in welfare coming from a change in pollution damage. Interesting results occur when both government and producers act strategically. In this case, the optimal pollution tax adds an “innovation effect”, which captures the change in welfare coming from a decrease in production costs. Now, the final effect on welfare will depend on whether the new equilibrium (after the tax) for the domestic industry is associated with higher or lower emissions levels.; The second examination develops an endogenous/exogenous model of growth to explore the links between economic growth, international trade, and environmental degradation. We first model a simple small open economy specialized completely in the production of a pollution-intensive good. Then, we proceed to calculate the decentralized and Pareto optimal paths of growth and the environmental tax that aligns them. Finally, we analyze the sensitivity of domestic growth rates and environmental policy with respect to the relevant parameters of the model. The main implications of our results are: First, an increase in foreign growth increases domestic growth through a change in the terms of trade, decreases environmental quality, and therefore increases the environmental tax. Second, changes in domestic productivity are positively associated to the levy of the environmental tax. Third, the indirect analysis of trade policy, e.g., through changes in preferences, also shows an ambiguous effect on domestic growth and environmental policy. This result depends on whether or not the domestic growth rate exceeds the foreign growth rate.