Low tariff on dirty goods—Environmental negligence or environmental concern?

Abstract

Shapiro (Quarterly Journal of Economics, 2021) conducts an in‐depth empirical analysis to show that dirtier upstream goods face lower import tariffs than cleaner downstream goods. Inspired by that paper, we examine how the welfare maximizing tariffs on the final goods will differ depending on the dirtiness and the extent of cross border pollution. We show that countries concerned about controlling pollution but maximizing own welfare would be encouraged toward relatively unfettered import of dirtier final goods if pollution is mainly generated through domestic production. We discuss the implications of global welfare maximizing tariff protection, pollution taxes, and multiple tradable products.