Working Paper: NBER ID: w19754
Authors: James R. Markusen
Abstract: International trade policy analysis has tended to focus on the production side of general equilibrium, with policies such as a tariff or carbon tax affecting international and internal income distributions through a Heckscher-Ohlin nexus of factor intensities and factor endowments. Here I move away from this structure to focus on demand and preferences. The specific context is an international environmental externality such as carbon emissions, and I assume a high income elasticity of demand for environmental quality. I analyze how per-capita income differences between two countries affect their abatement efforts in a non-cooperative policy-setting game. This outcome can then be used as a disagreement point to analyze cooperative Nash bargaining. In both outcomes, the poor country makes a lower abatement effort in equilibrium; indeed, it may make none at all and cooperative bargaining with only abatement levels as an instrument may offer no gains. Other features include a novel terms-of-trade externality in which an abating country passes on a part of its abatement cost to its trading partner, in which case the non-cooperative and cooperative outcomes are identical under special symmetry assumptions. When per-capita income differences are large, the poor country may be worse off when the rich country abates. Finally, I examine "issue linking" in international bargaining, in which one country is both large and rich, and hence has both a high tariff and a high abatement effort in a non-cooperative equilibrium.
Keywords: per capita income; international trade; environmental policies; abatement efforts; Nash bargaining
JEL Codes: F1; F18; Q56
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Per capita income differences between countries (F40) | abatement efforts (Q52) |
| Lower income level (I32) | lower abatement efforts (Q52) |
| One country's abatement efforts increase (Q52) | Other country's abatement efforts decrease (F64) |
| Higher per capita income (P19) | greater abatement efforts (Q52) |
| Cooperative bargaining outcome (J52) | no gains if abatement levels are only instruments (Q52) |