International Trade and the Environment: Policy Reform in a Polluted Small Open Economy

This paper investigates sufficient conditions for welfare-improving policy reforms in a small open economy facing many trade and pollution distortions. We investigate and compare reform in tax regimes, quota regimes, and mixed regimes, where some pollutants are regulated with taxes and others with quotas. It is also shown that the welfare benefits of reforming pollution policy are greater in an economy with international factor mobility than in an economy not subject to such mobility.