Transboundary Pollution From Consumption In A Reciprocal Dumping Model

Abstract

We analyse transboundary pollution externalities caused by consumption of goods. The model is of a reciprocal dumping type in which there are two countries and two firms. Each firm produces a homogeneous good to be consumed in both markets. There are two policies available to the governments of the two countries: consumption taxes and import tariffs. We characterise the Nash optimal levels of the instruments in the two countries. Our results suggest that the conditions satisfying higher consumption taxes in one country satisfy lower tariffs in that country. It is found that starting from non-cooperative solutions, an infinitesimal uniform reduction is unambiguously Pareto improving for each country and for the global welfare. This is because the gain from an increase in consumer surplus due to reform is larger than the loss in the tax revenues of the governments. Moreover, a revenue neutral reform which increases consumption taxes and reduce tariffs, is strictly Pareto improving.

Trade costs and the choice of international commodity tax base revisited: The role of transboundary pollution

“…But (29) focuses on consumption externalities rather than production externalities. Existing papers, such as Kayalica and Kayalica (), Lai and Hu (), and Fujiwara (), consider consumption externalities. The equilibrium values in the second stage of the game remain the same as in Section 5.…”

Is economic rebalancing toward consumption “greener”? Evidence from visibility in China, 1984–2006

“…Abstracting from tax revenue considerations, Beghin et al (1997) examine the welfare implications of environmental, production, consumption, and trade tax policy reforms. By constructing a reciprocal dumping model with consumption generated pollution, Kayalica and Kayalica (2005) demonstrate that a revenue neutral reform that increases consumption taxes and reduces tariffs is strictly Pareto improving. 3 Atmospheric researchers have conducted some studies to show the linkage between visibility and air pollutants in several localities of China.…”

Environmental Policy and Trade Liberalization: The Case of Transboundary Pollution From Consumption

“…Ishikawa and Okubo [2009] highlight the role of product differentiation to assess the effects of environmental and trade policies. Kayalica and Kayalica [2005] and Kayalica and Yilmaz [2006] compute the Nash equilibrium environmental and trade policies under international rivalry and local pollution from consumption. Furthermore, using a model of a small open economy, McAusland [2008] shows that tariff reductions give rise to a rise in emission taxes.…”

“…Although I follow Kayalica and Kayalica's [2005] modeling, I am mainly interested in the effects of bilateral tariff reductions on equilibrium emission taxes and welfare 6 . The main results are as follows 7 .…”