Environment, imperfect competition, and trade: Insights for optimal policy in general equilibrium

Abstract

I build a two-country general oligopolistic equilibrium model, in which sectors differ in emissions and technologies, and pollution can be transboundary. I derive the optimal bilateral environmental policy for the economy as a whole, for the cases in which the environmental damage either linearly or quadratically increases in total pollution. The analysis highlights that the optimal emission tax can even be negative, and bilateral trade liberalization should be matched with either a rise or a fall in the optimal emission tax. The moments of the emission distribution and technology distribution across sectors are fundamental to implement optimal environmental policies.

Environmental Injustice: The Effects of Environmental Taxes on Income Distribution in an Oligopolistic General Equilibrium Model

“…Although there is a huge amount of research on monopolistic competition, the literature delving into oligopolies within a general equilibrium framework is scarce (e.g., Hart [27,28], Neary [29][30][31][32], Neary and Tharakan [33], Leahy and Neary [34], Kreickemeier and Meland [35], Richter [36], Colaciccio [37,38]). This scant literature is primarily due to technical challenges (Hart [27,28]; Neary [29,32]) in terms of addressing how to prevent that oligopolies, which influence prices in goods markets, exercise also market power in factor markets.…”