Trade Liberalization and Endogeneity in a Unified Model of Production and Consumption Pollution

This paper models pollution with emissions both in the production and consumption of goods. Modeling simultaneous consumption and production pollution, and the effectiveness of import and export taxes across international jurisdictions are contributions to the literature. Two duopoly games are investigated with polluting firms/consumers located in different countries. Results show that for given import/export taxes, trade liberalization reduces pollution emissions, consumer surplus, and producer surplus. Further, Lerner's symmetry theorem holds with production and consumption pollution. Export taxes generate greater welfare and less social damage than import taxes, and countries choose a closed economy with endogenous import/export taxes.