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Edited by Jeroen C.J.M. van den Bergh
Chapter 27: Partial Equilibrium Models of Trade and the Environment
Kerry Kr utilla 1. Introduction In recent years, research exploring the nexus between environmental policy evaluation and non-strategic trade theory has increasingly relied on general equilibrium analysis (see Chapter 28 by Steininger, this volume). None the less, partial equilibrium modelling affords an efficient means of policy evaluation in an open-economy setting if the effects of policy actions on factor incomes are not of interest and outcomes do not differ substantively from those of general equilibrium analysis. In the ‘trade-and-environment’ context, partial equilibrium models are particularly useful for studying the consequences of terms-of-trade effects, and for indicating how such factors as a country’s commodity trade balance, and the type of the externality problem, affect the normative properties of environmental policy actions. This chapter reviews partial equilibrium modelling to assess the impact of trade liberalization on the environment, and to determine the structure of optimal environmental policy in an open-economy setting. For most of the chapter, pollution is assumed to be local, but the effects of environmental regulation in the transboundary context are also briefly considered. A number of standard assumptions underlie the analysis. First, in keeping with the orthodox trade literature, the ‘rest of the world’ does not respond strategically when a country initiates environmental regulation or trade-policy reform (see Chapter 29 by Ulph, this volume, for a discussion of strategic trade policy). Second, the environmental distortion in question is the only distortion in the economy, except when other distortions are explicitly addressed within the modelling framework.2 Finally, the production process...
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