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The B.E. Journal of Economic Analysis & Policy

Editor-in-Chief: Jürges, Hendrik / Ludwig, Sandra

Ed. by Auriol , Emmanuelle / Brunner, Johann / Fleck, Robert / Friebel, Guido / Requate, Till / Tsui, Kevin / Wichardt, Philipp / Zulehner, Christine

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Trade Pessimists vs Technology Optimists: Induced Technical Change and Pollution Havens

Corrado Di Maria1 / Sjak A. Smulders2

1Tilburg University,

2Tilburg University,

Citation Information: Advances in Economic Analysis & Policy. Volume 3, Issue 2, ISSN (Online) 1538-0637, DOI: 10.2202/1538-0637.1344, January 2005

Publication History

Published Online:
2005-01-07

Abstract

Our paper focuses on the role of endogenous technology and technology spillovers in explaining cross country differences in pollution and the pollution haven effect of international trade. In our North-South trade model, technology is endogenously developed by the North and imitated by the South. Environmental regulators choose national environmental policies by trading off the income gains and the disutility from a rise in pollution. Differences in environmental stringency are entirely driven by differences in investment opportunities and distortions that follow from the difference in intellectual property rights protection. We show that without goods trade and in the absence of technology subsidies, the North imposes more stringent environmental regulation than the South. When opening up to trade, the South experiences a rise in prices for pollution-intensive goods and tends to raise pollution as in a standard trade model. Induced technical change, however, may reverse this pollution haven effect.

Keywords: Pollution Havens; Endogenous Technical Change; International Trade

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