Oligopolistic eco-industries with free entry and trade liberalization of environmental goods

Abstract

In this paper, we assume two countries with trade of environmental goods (EGs), and then investigate the impacts of the emission tax, the tariff on imported EGs, and the subsidy for purchasing EGs. In our model, EGs are produced only in the exporting country, and the firms in the eco-industry which produces EGs engage in Cournot competition with free entry, while a polluting final goods sector in EGs’ importing country is perfectly competitive. Then, assuming the end of pipe pollution abatement in the polluting sector, we can obtain the following results: (I) Trade liberalization of EGs, that is, a decrease in the tariff on EGs and the subsidy for purchasing EGs increase the total output of EGs, and thus decrease the amount of emissions. (II) The impact of the subsidy on the price of EGs depends on the shape of the demand curve for EGs, while trade liberalization decreases the price. (III) The optimal emission tax level will be lower than the Pigouvian one if the level of the subsidy is higher than that of the tariff. (IV) The optimal tariff evaluating at the optimal emission tax level is negative, that is, the import subsidy can be optimal when the demand curve for EGs is linear or weak convex. (V) Under the same demand condition, the optimal purchasing subsidy is positive even when EGs’ importing country implements the optimal emission tax. JEL Classification: F12, F18, Q58