L10: Trade and the Environment Flashcards
Draw the Diagram for Trade between two countries
What are the key assumptions of this model? 4
Diagram
Two countries, free trade, each country as a price taker, just two goods
Using the diagram for Country X where environoment is ignored:
Following the introduction of PW , X becomes an importer of A
What happens to production/consumption?
How is this difference accounted for?
What happens to CS and PS? What areas?
Following the introduction of PW , X becomes an importer of X:
For X, production falls to Asx and consumption increases to Adx. Imports make up the shortfall
▪ CS increase from Pxbdx to Pwedx. PS falls from 0bPx to 0cPw
▪ Gain in CS (PxbePw) > Loss in PS (PxbcPw) by ceb
Using the diagram for Country Y where the environment is ignored:
Following the introduction of PW , Y becomes an Exporter of A
What happens to production/consumption?
How is this difference accounted for?
What happens to CS and PS? What areas?
For Y, production rises to Asy and consumption falls to Ady. The excess is exported
▪ CS falls from Pyfdy to Pwgdy. PS increases from 0fPy to 0hPw
▪ Gain in PS (PyPwhf) > Loss in CS (PwgfPy) by fhg
Using the diagram where the environment is incoporated to trade:
What does producing good A now create?
What changes for country X (importer of good A)
What changes for country Y (Exporter of good A)
Producing good A generates an adverse externality
▪ Externality falls in X from the fall in production which reinforces the benefit of trade to X
▪ Matters are not clear-cut for Y (the exporter). Increased production increases the external cost so the net gain falls or even becomes a net loss
Suppose free trade is accompanied by some
pollution control programme.
What happens in the country Y diagram?
What are the effects of the programme?
Suppose free trade is accompanied by some
pollution control programme.
▪ Pollution control programme: e.g., a uniform tax rate on units of emissions in Y
▪ This leads to 0S* as the supply function would rotate anticlockwise
▪ Production, emissions, external costs, and PS are all smaller than the trade-but-nopollution-control situation
▪ Again matters are not clear-cut for Y. Not possible to know whether the reduction in externalities will be more or less than the fall in PS, once again leaving the overall welfare effect ambiguous
Draw the diagram that is used to determine if implementing a environmental policy is worthwhile?
slide 9
Using the MD vs MCA diagram:
How do you determine if the pollution externality has been internalised?
What is the TDC and TAC at MB?
What happens to TDC and TAC when emissions are reduced because of the policy.
What is the net welfare gain?
Trade yields a net welfare gain if accompanied by an economically efficient pollution control.
▪ Minimises the sum of total abatement costs plus total damage costs.
▪ With such a control to internalise any pollution externality, the gain in avoided pollution costs is greater than the fall in PS.
▪ At MB the sum of TDC (0BMB) and TAC (CMBM‘) is 0BCM’
▪ Cutting emissions to M, TDC fall by ABMBM
and TAC increase by ACMBM*. The former is
greater than the latter by ABC
What are two hypotheses that allow us to analyse trade and environment interactions?
Factor endowment hypothesis
Pollution Haven Hypothesis
What is Factor Endowment Hypothesis?
What does this suggest for trade and different types of countries?
What does a comparative advantage imply about a country?
What happen
Factor Endowment Hypothesis: due to the classical Hecksher-Ohlin-Samuelson model of trade. Assuming capital intensive industries pollute more, capital
intensive processes will gravitate to capital abundant economies through trade
▪ Theorem suggests that trade is shaped by differences in factor endowments.
▪ A country will export goods relatively intensive in its abundant production factor and import goods relatively intensive in its scarce factor of production.
▪ For example, a country having an abundant supply of capital will find it cheaper to manufacture goods whose production is capital intensive.
▪ The country is said to have a ‘comparative advantage’ in the production of such goods.
What happens post- free trade to labour intensive goods?
Why ? 2
What about capital intensive goods?
What happens overall?
▪ Post free trade the consumption of the labour intensive goods will increase because of an increase in national income and a positive substitution effect whereas the consumption of capital intensive goods may or may not increase.
▪ Taken as a whole, consumers unambiguously reach a higher level of welfare.
What is pollution haven hypothesis?
What is an assumption?
What happens to low income countries as a result of trade?
▪ Pollution Haven Hypothesis: Income differences generate differences in the degree of environmental regulation.
▪ Higher-income countries have stricter regulation than lower-income countries.
▪ Assuming production costs rise with regulation, low income countries will become more pollution intensive as a result of trade
What can be said about both theories?
Which theory is more applicable from empirical evidence?
▪ Not necessary to choose between the two hypotheses because they are not mutually exclusive
▪ Both are intuitively plausible. Empirical work suggests that trade reflects factor endowments not differing emissions abatement costs (proxy for environmental regulation)
What can be said about pollution haven hyp for the future?
▪ Pollution haven hypothesis is likely to come to the fore in the future because in general, environmental regulations are tightened over time
