CHAPTER 4 NONCOOPERATIVE VERSUS COOPERATIVE ENDOGENOUS DOMESTIC AND TRADE POLICIES WITH ENVIRONMENTAL EXTERNALITIES

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1 CHAPTR 4 NONCOOPRATIV VRSUS COOPRATIV NDOGNOUS DOMSTIC AND TRAD POICIS WITH NVIRONMNTA XTRNAITIS 4.1. Introducton Th paper explore the relatonhp of to dtnctve feature of recent trade negotaton: the emergence of the trade-envronment complex and the mpact of pecal-nteret lobbyng. For example, the agreement of the GATT Uruguay Round ncorporate a ork program on the envronment and trade, ncludng the foundaton of a Commttee on Trade and nvronment and agreement on Santary and Phytoantary Standard and on Techncal Barrer to Trade. Some even predct that the next GATT round of negotaton could be the Green Round. 54 NAFTA the frt trade agreement n htory to formally contan envronmental objectve, and nclude, for example, an nvronmental Sde Agreement a ell a a US- Mexco Integrated Border nvronmental Plan. 55 Whle publc dcuon ha often focued on trade polce, tandard economc theory ugget that dometc polce are more effcent to addre an externalty. Trade polce ncur a hgher deadeght lo th le envronmental protecton than a more drect nterventon uch a effluent fee, or nput, output, or conumpton taxe. The uperorty of dometc polce on effcency ground alo recognzed n the GATT. GATT Artcle XX allo countre to devate from bac GATT oblgaton for certan publc polcy goal uch a the protecton of human lfe or health, but protectve trade meaure are prohbted hen thee goal can be fully acheved through non-dcrmnatory GATT-conformng dometc polce. 56 In addton, varou Internatonal nvronmental Agreement (IA) uch a the 1987 Montreal Protocol (on Subtance That Deplete the Ozone ayer) or the 1972 Stockholm Conference on Human nvronment addre the ue of dometc a ell a trade polce for envronmental purpoe. In general IA tate envronmental goal and let member countre choe polce to acheve thee goal. Whle command-and-control type regulaton tll the domnant approach, the role of market-baed polce uch a co-taxe ha been ncreang for poltcal and economc reaon, at leat n OCD countre (OCD 1995). When budget are tght, polcy-maker fnd the revenue generated by envronmental or health taxe, for example, on energy, motor vehcle and tobacco product, partcularly attractve. 54 For example, Charle R. Carlle, then Deputy Drector-General of the GATT (quoted n Wlknon, 1994). 55 See ty (1994) for a detaled decrpton of envronmental conderaton n NAFTA. 56 See Sora (1992) for the relatonhp beteen GATT rule and varou envronmental ue. 58

2 Fnally, ome nternatonal trade agreement addre not only trade polce, but alo trade-dtortng dometc polce. In partcular, the Uruguay Round Agreement of the GATT requre a 20-percent reducton n total expendture on prce upport n agrculture, hch mght alo have mplcaton for envronmental qualty. For example, heat and corn producton account for over 50 percent of all ntrogen fertlzer appled n the Unted State, caung attendant ater qualty problem. Thu, dependng on the producton technology, a reducton n dometc prce upport mght lead to a decreang fertlzer ue and mprovng envronmental qualty. Whle the Uruguay Round dometc upport reducton are etmated to have lttle effect gven prevou dometc polcy reform and pecfc GATT excepton (Orden 1994), future GATT provon on dometc program mght become bndng. The above obervaton lead to the concluon that trade polce hould be analyzed n conjuncton th dometc polce, n partcular n the trade and envronment context. Such analy developed n th paper. The nfluence of organzed nteret group on the tructure of trade polce ha long been recognzed. A ell developed lterature on endogenou trade polcy formaton derve the equlbrum polce a the outcome of a poltcal proce that may nclude elf ntereted government, organzed ndutry group, bureaucrat and voter a partcpant (ee Hllman 1989 and Rodrk 1995 for overve). A Groman and Helpman (1995, p. 676) pont out, th lterature almot excluvely conder the mall-country cae. Thu, government et trade polce thout regard to the objectve and reacton of other countre government. 57 To analyze the trategc relatonhp beteen nteret group and the government on the natonal level, and beteen government from dfferent countre on the nternatonal level, Groman and Helpman (1995) examne the tructure of protecton n a large-country model hen government et trade polce ether noncooperatvely (trade ar) or cooperatvely (trade talk). In the Groman-Helpman frameork, hch a orgnally appled to analyze ndutry protecton n a mall-country model (Groman and Helpman 1994), protecton-eekng lobbe of oner of ector-pecfc factor of producton offer a menu of polcy-contngent contrbuton (chedule) to an ncumbent government (agent) n order to nfluence t trade polcy tance. In modelng the nteracton beteen the government and the lobbe (prncpal) a a common agency game th perfect nformaton, th model provde a mcro-foundaton for the tandard reduced-form poltcal upport functon approach. The upport-functon approach, hch due to Stgler (1971) and Peltzman (1976), feature a elf-ntereted polcy-maker that et polce to maxmze a eghted um of degnated nteret group elfare and ocal elfare. Campagn contrbuton are not formally modeled and have no drect mpact on the government polce n the poltcal upport functon approach. 57 Hllman and Moer (1995), ho ue a poltcal upport functon approach, and Groman and Helpman (1995) themelve, are the excepton. 59

3 Untl recently, formal analye of the poltcal economy of trade and envronmental polce ere rare. Hllman and Urprung (1992) apply the poltcal competton approach to ho ho organzed nteret group affect the chance for lberal veru protectont polcy outcome. Organzed ndutry and envronmental group make contrbuton to canddate th predetermned polcy tance n order to ncreae the probablty of ther favorte canddate gettng elected. Recent tude by Bommer (1996) and Bommer and Schulze (1996) are baed on the poltcal upport functon approach. Bommer ho that uropean ntegraton could lead to a hgh-level harmonzaton of envronmental proce tandard, ntead of a donard competton that ould provde dometc ndutre th a compettve advantage. Bommer and Schulze demontrate that trade lberalzaton, hch favor drty exportng ndutre, allo government to mpoe tghter envronmental tandard to atfy clean mportng ndutre and envronmental group. The model above typcally nclude one or to ndutre, hch excluvely maxmze proft, and organzed envronmental group, hch excluvely maxmze envronmental qualty. The conumpton de of the economy generally neglected. If thee model dd not nclude envronmental group, the polcy maker ould not care about the envronmental mpact of the elected polce. Th dffer fundamentally from the tude by Fredrkon (1997), Adt (1997a,b) and Schlech (1997) hch are baed on the Groman-Helpman model. In the latter model, the utlty of ndvdual member of the ndutry lobbe alo depend on the level of the producton externalty, the lobbe contrbuton chedule ll ncorporate the mpact of the government producton polce (taxe or ubde on output) on the envronment. Thu, the government concerned about the externalty even hen there are no organzed envronmental lobbe per e. Adt man objectve to demontrate ho the menu aucton n the common agency game lead to the nternalzaton of a producton externalty. Fredrkon and Adt (1997a) concentrate on one endogenouly derved polcy only, that on producton polcy, hle Adt (1997b) alo allo for nput taxe/ubde. Adt and Fredrkon allo for organzed envronmental group, but they only conder a producton externalty. Schlech characterze the poltcal equlbrum polce hen the government ha multple polce avalable and hen producton or conumpton of an ndutry output generate a local negatve externalty. In h model, the government can apply dometc polce--that ubde or taxe on producton or conumpton--and trade polce--that ubde or taxe on mport and export--to atfy the lobbe and to addre the externalty. Th paper extend prevou ork n everal dmenon. Ung the Groman-Helpman nteret group frameork, the poltcal equlbrum tructure of envronmental and ndutry protecton for to large open econome (home and foregn) characterzed, hen government chooe dometc polce together th trade polce. Government decde on ther polce ether noncooperatvely or cooperatvely. The equlbrum outcome hen government have only one type of polcy avalable, ether dometc or trade polce, are analyzed a pecal cae of the general model. 60

4 It hon that, hen there are no externalte, the reult of Groman and Helpman (1995) for the noncooperatve and cooperatve cenaro are a pecal cae hen the government have only trade polce at hand. Groman and Helpman (1995) have alo hon that, hen government negotate over trade polce only, ndutry protecton depend on the ndutry poltcal poer compared to that of t counterpart abroad. Becaue of the market clearng condton, one ndutry ll be better off and the other ndutry ll be ore off than under free trade. The fndng ndcate further that, hen producton polce (or conumpton and trade polce) are avalable, poltcally trong home and foregn ndutre can both enjoy ubtantal protecton. When only conumpton polce are avalable, protecton for an ndutry ncreae th the poltcal poer of the ndutry abroad and protecton for both ndutre the ame. In extendng the model to nclude externalte, local and global producton and conumpton externalte are condered eparately. Thu, t ll be llutrated ho ether local or global producton and conumpton externalte can be nternalzed hen government et ther polce cooperatvely and lobbe contrbuton chedule depend on the outcome of the negotaton, that on all countre dometc and trade polce. The reult ho that a poltcal economy veron of Bhagat (1971) normatve targetng prncple apple n the noncooperatve a ell a n the cooperatve cenaro of the extended large-country Groman-Helpman poltcal economy model. In the noncooperatve cenaro, hen government have both polce avalable and the producton of a good caue a negatve externalty, government ue producton ubde to atfy the lobbe, hch are counterbalanced by envronmental producton taxe. Trade polcy ued to explot the term of trade and--hen the externalty global--to reduce producton abroad by decreang the orld prce. In a normatve analy Krutlla (1989) ha hon that n a large-country model the choen output tax for a local producton externalty hgher than the tandard Pgouvan tax f the country an exporter becaue a producton tax alo ued to affect the term of trade. The fndng ndcate that for an exportng country the poltcal equlbrum tax mght even be loer than the Pgouvan tax nce the government tre to pleae the lobbe th loer output taxe For a negatve conumpton externalty, trade polce are ued to atfy the lobbe, to explot nternatonal market poer and--hen the externalty global--to reduce conumpton abroad. The conumpton polcy appled to offet the dtorton that are due to the poltcal poer of lobbe a ell a to addre the externalty. For a normatve model, Krutlla ha hon that n a large-country model the choen conumpton tax for a local conumpton externalty hgher than the tandard Pgouvan tax f the good mported becaue a conumpton tax alo mprove the term of trade. Snce n the poltcal equlbrum the government ue a conumpton ubdy to addre the lobbe, the conumpton tax n the poltcal equlbrum mght be loer than the Pgouvan tax. 61

5 In the cooperatve cenaro, the poltcal equlbrum polce are the ame hether government have only producton polce or producton polce together th trade polce avalable. Snce cooperatng government no longer ue ther polce to manpulate the term of trade, they apply producton polce to atfy the lobbe and to addre a local or global producton externalty. 58 Therefore, envronmental protecton ll generally be loer than under a Pgouvan tax. Converely, n the cooperatve cenaro for a conumpton externalty, government prefer to ue both polce. Trade polce are appled to atfy the lobbe hle conumpton polce addre the dtorton arng from the trade polce a ell a the externalty. In th cae, envronmental protecton the ame a under a Pgouvan tax. Secton 4.2. develop the noncooperatve model for the producton externalty. In Secton 4.3. the reult for the conumpton externalty are analyzed. In Secton 4.4. the cooperatve model for the producton externalty explored and n Secton 4.5. the cooperatve outcome for a conumpton externalty are tuded. Concluon are preented n Secton Producton xternalty under Noncooperaton The model baed on Groman and Helpman (1995) and contan to large countre, home and foregn, th mlar poltcal and economc ytem. The expoton focue on the home country, hle varable and parameter aocated th the foregn country are denoted th an aterk. Th ecton develop the general frameork for a producton externalty hen government do not cooperate. Conumer In the home country, the populaton of N redent provde a total labor upply l and ha dentcal, addtvely eparable qua-lnear preference defned over (n+1) good and n envronmental qualty. ach ndvdual j maxmze u = c + u ( c ) + u ( ), here c 0j the j 0j j j = 1 conumpton of the numerare good, c j the conumpton of good by ndvdual j, and u ( j ) the utlty that ndvdual j derve from the tate of the envronment a determned by the externalty. All u j (.) are aumed to be ncreang and concave functon, and, for pecfcty, t aumed that the externalty negatve, that u j = u < 0. The qua-lnear preference lead to ordnary demand functon that depend only on ther on prce d ( p d ), and all ndvdual have the ame margnal utlty of ncome equal to one. j j 58 See Dxt, Groman and Helpman (1997) on the choce of effcent polce n the Groman-Helpman nteret group model. 62

6 d d Indvdual ndrect utlty can be expreed a v(p, y, ) = y + (p ) + u ( ) here d d d d p =( p, p,..., p ) the vector of conumer prce for nonnumerare good, y repreent her 1 2 n n n d ncome, and (p ) = u [d (p d )] - p d d d (p ) her conumer urplu from all =1 =1 nonnumerare good. Indvdual demand are d( p d ) =, and total demand for any good d p d n the home country D( p ) = Nd( p d ), th D = D d < 0. p Producer All ector produce under perfect competton. The numerare good made from labor alone, uch that one unt of labor produce one unt of output. Snce the dometc and orld (offhore) prce of the numerare good are equal to one, the economy de age rate fxed at unty. All other good are produced from labor and one nelatcally uppled pecfc nput, th contant return to cale n both factor but dmnhng return n ndvdual factor. Th producton tructure lead to (aggregate) qua-rent of Π ( p ) to the fxed factor n ndutry that only depend on the output prce receved by producer p, th upply X( p ) = Π ( p ), and X = X > 0. p Suppoe that the producton of one or more nonnumerare good e n one or both countre generate an externalty uch that ( X e, X e ) = X > 0 and X e ( X, X ) e e = γ 0, here γ = 1 f the externalty global and γ = 0 othere. The X X e externalty doe not affect the producton proce of any other good, but ntead t negatvely affect the ell-beng of conumer. obbe Oner of the pecfc factor ued n the producton of good have an ncentve to lobby for polce that rae p becaue a hgher prce ncreae ther rent. An exogenouly determned ubet of all oner of a pecfc factor aumed to overcome the free-rder problem (Olon, 1965) and organze themelve n order to affect government polce. 59 ach of thee lobbe repreent one of the n ector-pecfc factor and offer the government a contrbuton chedule 59 It aumed that each ndvdual can on at mot one pecfc factor. 63

7 that map every polcy vector nto a non-negatve contrbuton level. Follong Groman and Helpman (1995), lobbe can only nfluence the polce n ther on country. So, the home (foregn) lobbe contrbuton chedule are contngent on the home (foregn) polce only. obbe are aumed to credbly commt to ther acton or rte bndng contract. The government then chooe ther polce to maxmze ther objectve. Government ach government aumed to maxmze a eghted um of monetary contrbuton from organzed ndutre and total conumer elfare. The government ue the contrbuton for t reelecton campagn or for t on prvate conumpton. It concerned about total conumer elfare becaue conumer ell-beng nfluence t chance for reelecton or for (unpecfed) ethcal reaon. To acheve t objectve, the government can mpoe ad valorem producton polce τ and/or trade polce θ on any of the nonnumerare good. The producton polce drve a edge beteen the prce that con umer and producer face, and the trade polce eparate dometc producer and orld (or offhore) prce p. Supply and demand prce equlbra for good requre p = θ τ p and p d =θ p repectvely. The net revenue of the government (excludng contrbuton by lobbe) generated by t dometc and trade polce. The ue of dfferentated lump-um taxe or ubde a an ndependent polcy ntrument ruled out by aumpton, but the government net revenue redtrbuted evenly on a per-capta ba. The net per-capta tranfer by the government n () 1 (, ) 1 1 d r τθ = p ( τ 1) X ( p ) + p ( θ 1)[ D ( p ) X ( p )]. N N = 1 = 1 n Contrbuton receved by the government from organzed nteret group are not part of the percapta tranfer (1) and do not enter the ubequent market equlbrum condton of the model, except to mply a decreae n ncome of oner of the ector-pecfc factor utlzed n organzed ndutre. ke Groman and Helpman, the analy n th paper baed on Bernhem and Whnton ho model the lobbe and government behavor a a frt-prce menu aucton n a common agency game Alternatvely, the equlbrum outcome could be derved ung the Nah barganng oluton a n Chapter 3. 64

8 qulbrum under Noncooperaton In the frt tage of the to-tage noncooperatve game, lobbe n ether country multaneouly and noncooperatvely et ther contrbuton chedule contngent on ther on country dometc and trade polce C ( τθτ, ;, θ ). 61 In the econd tage, the home and foregn government et both polce multaneouly and noncooperatvely, takng the mpact of ther acton on the other country government and lobbe a gven. Startng th the econd tage of the game, the home government aumed to maxmze a eghted um of total contrbuton and average conumer elfare () 2 G= C (,; τθτ, θ ) + aw(, τθτ,, θ ), here the coeffcent a capture the trade-off beteen contrbuton and total conumer elfare a perceved by the home country government. Total conumer elfare cont of the um of total labor ncome, total proft, net government revenue, total conumer urplu, and the total utlty derved from envronmental qualty. Thu n d () 3 W(, τθτ,, θ ) l+ Π ( p ) + Nr(, τθτ,, θ ) + N( p ) + Nu ( ) = 1 In the frt tage of the game, each lobby chooe t contrbuton chedule to maxmze the (aggregate) net elfare of t member ( 4) W ( τθτ,,, θ) C ( τθτ,,, θ) d l + Π ( p ) + [ N r( τθτ,,, θ) + N ( p ) + N u ( )] C ( τθτ,,, θ), here N the number of people that on factor and l ther (aggregate) labor ncome. Neceary condton for a ubgame-perfect equlbrum, hch cont of a et of 0 contrbuton chedule ({ C },{ 0 } C ) and polcy vector ( τ 0, θ ) and ( τ, θ ), are (ee Groman and Helpman 1994, 1995): 62 ) C 0 feable for all, that contrbuton chedule mut not be negatve and cannot exceed the aggregate ncome of each lobby gven ( τ, θ ) and ( τ, θ ) ; 61 The foregn polce appear n the home contrbuton chedule a parameter becaue the home lobbe elfare depend on the foregn polce. Hoever, the home contrbuton are not et to affect the foregn polce. 62 Smlar condton have to hold for the foregn lobbe contrbuton chedule and the foregn dometc and trade polce. 65

9 0 0 ) ( τ, θ ) maxmze 0 ( 5) C ( τθτ, ;, θ) + aw( τθτ,,, θ), that the optmal home polcy vector are a bet repone, gven the lobbe contrbuton chedule and the polcy choce of the foregn government; and 0 0 ) ( τ, θ ) maxmze for every j j 0 0 ( 6) W( τθτ,,, θ) C ( τθτ, ;, θ) + C ( τθτ,,, θ) + aw( τθτ,,, θ) Condton (6) mple that the equlbrum polce have to maxmze the um of any lobby net elfare and the government objectve functon, gven the payment of all other lobbe. If th condton a volated for any lobby, t could modfy t contrbuton chedule uch that the government elected a more favorable polcy vector, and the urplu from uch a tch could be hared by lobby and the government. A n Groman and Helpman (1994, 1995) aume that the equlbrum nteror and that the contrbuton chedule are dfferentable around the equlbrum pont. Takng the frt order condton for (5) and (6), and combnng term yeld ( 7) C ( τ, θ ; τ, θ ) = W( τ, θ, τ, θ ), for β = τ, θ and for all, β β here denote the gradent vector of the partal dervatve th repect to the β. quaton (7) requre that the margnal change n payment to the government for a mall change n the polcy vector ha to equal the margnal change n lobby gro elfare. 63 In partcular, nce enter the ndvdual utlty functon of member of any lobby, the effect of a change n the 63 Snce under th condton, the hape of the contrbuton chedule reveal the lobbe true preference around the equlbrum pont; Groman and Helpman (1994) refer to them a beng locally truthful. ocal truthfulne uffce to characterze the tructure of protecton. Snce th game n prncple ha multple Nah-equlbra, one ha to be elected to determne lobbe payment n equlbrum. Groman and Helpman (1994) chooe the truthful equlbrum, n hch contrbuton chedule correctly reflect the lobbe preference globally, not jut around the equlbrum pont. In the truthful equlbrum, each lobby pay to the government for any polcy vector (τ,θ) the exce of lobby gro elfare at (τ,θ) relatve to ome bae level of elfare (Groman and Helpman 1994, p. 840). A (globally) truthful equlbrum may be focal among the et of Nah equlbra for to reaon: (1) t coalton-proof, that t table to nonbndng communcaton among the lobbe, and (2) t effcent for the trategc player, that, gven the avalable polcy ntrument no feable Pareto uperor outcome ext for the government and the organzed nteret group (for dcuon, ee Bernhem and Whnton, for qualnear preference, and Dxt, Groman and Helpman, for more general preference). In the Groman-Helpman poltcal economy model, nce total elfare appear n the government objectve functon, effcent choce are made at the truthful equlbrum not jut for the trategc player but for the entre polty (ee Corollary 2 to propoton 5 n Dxt, Groman and Helpman). 66

10 polcy varable τ and θ on the qualty of the envronment are taken nto account by all lobbe. Summng equaton (7) over all and then ubttutng nto the frt-order condton for equaton (2) yeld β β () 8 W( τ, θ ; τ, θ ) + a W( τ, θ, τ, θ ) = 0, for β = τ, θ. Ung equaton (1), (3) and (4), and then collectng term, the frt-order condton for the equlbrum nterventon n ndutry can be expreed a ( I α ) X M p ( 9a) ( τ 1) = ( θ 1) ( a + α ) p X + + p ( θ D + θ M ) p Nu Nu θ X X X γ p τ p ( θ D + θ M ) ( I α ) X M p X ( 9b) ( θ 1) = ( τ 1) ( a + α ) τ p M p M τ p M Nu X Nu X X X + γ, τ p M τ p M X here M = D and = X M D τ τ are the dervatve of home and foregn mport N demand th repect to dometc prce, and α = 1 the exogenou hare of the N populaton that on pecfc factor n organzed ndutre. The δ and I are ndcator varable: δ =1 f conumpton create an externalty, that for =e, and δ =0 othere; I =1 f ndutry organzed and I =0 othere. Solvng equaton (9a,b) multaneouly, lead to mplct expreon for the poltcal equlbrum level of the home country producton and trade polce ( I α) X ( 10a) ( τ 1) = ( a + α ) px Nu p X ( I α) 1 = ( a + α ) ε, X p Nu p X M Nu X X 1 Nu X X ( 10b) ( θ 1) = + γ = + γ, p θ M p τ M ε p τ M 67

11 here ε the elatcty of foregn exce upply, hch potve (negatve) hen the home country mport (export) good. 64 quaton (10a,b) together th ther foregn counterpart determne the poltcal equlbrum level for producton and trade polce. When producton and trade polce are avalable, the government ue both polce n the poltcal equlbrum hether the producton of good caue an externalty or not. The tructure of ndutry and envronmental protecton ll no be characterzed n greater detal. In partcular, t analyzed hch polcy atfe lobbe and hch polcy addree a local or global externalty. Further t explored hat determne hgh veru lo ndutry and envronmental protecton. When the producton of good doe not caue an externalty, the equlbrum producton polcy n equaton (10a) contan only a poltcal upport effect. For α < 1, the equlbrum polcy ll be an output ubdy f ndutry organzed (I = 1) and a tax f t not (I = 0). In order to atfy the lobbe, the government acrfce producton effcency, ubdzng organzed ndutre, and taxng unorganzed ndutre. In general, the poltcal upport effect on producton polcy, and hence on protecton for an organzed ndutry, nverely related to a, the eght the home government attache to total elfare, alo to α, the degree of organzaton, nce member of all other organzed ndutre (a conumer) ll bd agant protecton of any gven ector, and fnally to ε X e p the elatcty, e of output upply, reflectng the deadeght lo aocated th the nterventon. When the country large, t ue t trade polcy to explot t nternatonal market poer. Independent of hether the ndutry organzed or not, hen there no global externalty, the optmal trade polcy an mport tarff or an export tax and equaton (10b) jut the formula for the optmal tarff. When the producton of the good generate an externalty (=e, δ =1), the econd term on the RHS of equaton (10a) repreent an addtonal envronmental effect. It requre a producton tax and capture the negatve effect of an addtonal unt of output from home producton on the elfare of the home country conumer. Th envronmental effect ncreae th the home populaton ze (N), nce the ocal cot aocated th the externalty ncreae th the number of people affected. The envronmental effect further ncreae th the margnal utlty of the externalty ( u ), that the more envronmentally entve home redent are, the hgher ll be the tax. Fnally, the envronmental effect ncreae th the margnal contrbuton of home output to the externalty ( X ), that the more pollutve the home ndutry at the margn, the hgher ll be the tax. M. 64 Note that reult for the mall country cae can be obtaned for ε ( ) 68

12 When the producton of the good caue a global externalty (γ =1), the trade polcy contan an addtonal global envronmental effect that addree the negatve mpact of foregn producton on the elfare of the redent n the home country. It potve and requre an mport tarff or an export ubdy. Thee polce loer the orld prce hch n turn lead to a decreae n the foregn producer prce, foregn producton and the global externalty. Th global envronmental effect ncreae th home populaton ze, th the entvty of home redent toard the envronment, th the pollutvene of foregn output ( X ), and the prce dervatve of foregn upply ( X ). On the other hand, the global envronmental effect decreae th the prce dervatve of foregn export upply (- M ). The larger - M (d et, the flatter foregn exce upply) the maller the change n the foregn producer prce from a change n the come country polce. To um up, the reult llutrate that Bhagat (1971) targetng prncple from normatve economc analy alo apple to the Groman-Helpman large-country poltcal economy model. The government ue the producton polcy to addre the lobbe a ell a the externalty generated by dometc producton. The government ue the trade polcy to explot t market poer and to reduce a global externalty generated by producton abroad. Whether the equlbrum producton and trade polce are taxe or ubde generally ambguou. When the ndutry organzed (not organzed) and the producton of the good generate an externalty, the poltcal upport effect requre a producton ubdy (tax), and the envronmental effect requre a tax. When the good exported (mported), the term-of-trade effect requre an export tax (mport tarff) and the global envronmental effect requre an export ubdy (mport tarff). No conder the cae hen the government have only producton polce avalable. Settng the ad valorem trade polce n equaton (9a) equal to one, the poltcal equlbrum producton polcy for the home country mplctly gven by ( I α ) X M Nu Nu X X X ( 11) ( τ 1) = δ γ ( α ) ( ) τ a + p X + p D + M p p ( D + M ) The frt term agan the poltcal upport effect hch reflect the mpact of the lobby group on the producton polcy. The econd term the term-of-trade effect hch capture the prcereponvene of compote demand and take on a potve (negatve) value f the home country export (mport) good. The thrd term repreent the local envronmental effect and requre a tax to addre the externalty generated by home producton. Fnally, the forth term tand for the global envronmental effect hch mple an output ubdy leadng to a loer orld prce, and thu a reducton n the global externalty from reduced foregn producton. Agan, t generally ambguou hether the producton polcy a tax or a ubdy. 69

13 In a normatve analy Krutlla (1989) ha hon that n a large-country model the choen output tax for a local producton externalty hgher than the tandard Pgouvan tax f the country an exporter becaue a producton tax alo ued to affect the term of trade. A more general veron of Krutlla equlbrum tax embedded n equaton (11). The econd term and the thrd term n equaton (11) reflect the term-of-trade and envronmental tax component of Krutlla producton polcy. quaton (11) further llutrate that hen the mpact of organzed ndutre taken nto account the equlbrum producton tax for an exportng country mght even be loer than the Pgouvan tax, becaue the government ue a producton ubdy to atfy the lobby of ndutry. When the government are retrcted to trade polce the poltcal equlbrum polcy for the home country ( I α ) X 1 Nu X X ( 12) ( θ 1) = δ ( a + α ) p M + ε p M Nu X X + γ p M. When producton n ndutry doe not caue an externalty, the equlbrum trade polcy contan poltcal upport and term-of-trade effect. The poltcal upport effect potve and repreent an mport tarff or an export ubdy hen the ndutry organzed and an mport tax or an export ubdy hen the ndutry not organzed. A before, the term-of-trade effect take on the formula of the optmal tarff. Wthout the externalty, equaton (12) the ame a n Groman and Helpman (1995). Thu, the poltcal equlbrum polce n Groman and Helpman are a a pecal cae hen trade polce are the only avalable polce. 65 For any gven level of ndutry protecton (that for any gven output prce), producton polcy caue le cot than trade polcy to the other lobbe and total elfare. Thu, upport for the organzed ndutre ll be hgher ung producton polcy (or n combnaton th trade polcy) than ung trade polcy only. When producton of the ndutry caue an externalty, the thrd term n equaton (12) negatve requrng an mport ubdy or an export tax to addre the dometc producton externalty. Thee polce loer the prce home producer receve leadng to reduced output and a loer level of externalty. For a global externalty equaton (12) contan a fourth term, hch potve and requre an mport tarff or an export ubdy to loer foregn producton through a decreae n the orld prce. 65 Dxt (1996) and Schlech and Orden (1996) etablh a mlar reult for the mall-country model: the tructure of protecton a derved by Groman and Helpman (1994) doe not hold, hen producton polce are alo avalable. 70

14 In general, the gn of equaton (12) ndetermnate. For example, hen the ndutry organzed and mport-competng, the poltcal upport, the term-of-trade and the global envronmental effect are all potve, callng for an mport tarff, hle the dometc envronmental effect requre an mport ubdy. When the ndutry organzed and the good exported, term-of-trade and home envronmental effect requet an export tax, hle the poltcal upport and the global envronmental effect mply an export ubdy. ke n the mall-country model, n the large-country model heren, t alo poble that trade polcy alone lead to hgher envronmental qualty than producton polcy alone. In the large country cae, the term-of-trade effect ll be an addtonal determnant of hether trade polcy alone or producton polcy alone lead to hgher envronmental qualty. When the pollutng ndutry exportng, for the trade polcy and the producton polcy, the term-of-trade effect renforce the (local) envronmental effect nce both effect requre an export tax or an output tax, repectvely. When the pollutng ndutry mport competng the to effect oppoe each other for the trade polcy and the producton polcy. In th cae, the term-of-trade effect for the trade polcy requre an mport tarff hle the envronmental effect requre n mport ubdy. For the producton polcy, the term-of-trade effect requre an output ubdy hle the envronmental effect requre an output tax. Thu, nce the relevant term-of-trade effect for the trade polcy n equaton (12) and producton polcy n equaton (11) are evaluated at dfferent pont, no general concluon can be dran a to hether the term-of-trade effect ncreae or decreae the chance that trade polcy alone ll lead to hgher envronmental qualty than producton polcy alone. Hoever, hen the foregn mport demand elatcty contant, or hen the equlbrum mport under the producton and the trade polcy are dentcal, the termof-trade effect ll ncreae (decreae) the chance that trade polcy alone ll lead to hgher envronmental qualty than producton polcy alone hen the good exported (mported) Conumpton xternalty under Noncooperaton Suppoe that home and pobly foregn conumpton of a nonnumerare generate a negatve externalty for redent n the home country. For mplcty aume that for each N N ndvdual j, the externalty jut = c + γ c. For γ =0, the externalty local ek k = 1 k = 1 k j hle for γ =1, the externalty global. When an ndvdual decde on her level of conumpton of a ek 66 Th reult can be deduced by npecton of the term-of-trade effect n equaton (11) and (12). Unlke for the trade polcy, the denomnator of the term-of-trade effect for the producton polcy alo nclude the dervatve of dometc demand, hch alo negatve. Thu, the abolute value of the term-of-trade effect for the trade polcy unambguouly larger than the abolute value of the term-of-trade effect for the producton polcy hen the foregn mport demand elatcty contant, or hen the equlbrum mport under the producton and the trade polcy are dentcal. 71

15 good e, he doe not take nto account the effect of her decon on any other ndvdual utlty. 67 Conumer preference beteen countre may dffer, but aume that preference are dentcal thn countre. Therefore the ubcrpt for conumer can be dropped. Thu, = ( N 1) c + γ N c, th e e = ( N 1 ) and = γn. c c e e When lobbe et ther contrbuton chedule, they agan take nto account ho the government nterventon affect ther member elfare through mpact on. The prce equlbrum condton for the upply and demand of good are no d p =θp and p =τθ p. The conumpton and trade polce generate the net per-capta government tranfer n n 1 d 1 d ( 13) r( τθτ,,, θ) = p ( τ 1) D( p ) + p ( 1)[ D( p ) X ( p )]. θ N = 1 N = 1 Ung the ame approach a before, the frt-order condton for the equlbrum nterventon n ndutry lead to ( I α ) X M θ M ( 14a) ( τ 1) = + + ( θ 1) ( a + α ) p ( θx θ M ) p ( θx θ M ) θ( θx θ M ) u ( N 1) Nu D τθ γ p p ( θ X θ M ) ( I α ) X M p X ( 14b) ( θ 1) = ( τ 1) ( a + α ) p τ M p θ M τ p M u ( N 1) τ D Nu D τ θ + γ, p M p θ M here no M = τ D X < 0 and M = τ D X < 0. Solvng equaton (14a,b) multaneouly gve mplct expreon for the home country conumpton and trade polce for ndutry ( I ) ( ) ( 15 ) ( 1 α X u N 1 a τ ) =. ( a + α ) px p ( 15b) ( θ 1) = ( I α ) X ( a + α ) p X 1 Nu D τ + + δ ε p M 67 Aumng that N (N) are uffcently large jutfe th aumpton. 72

16 quaton (15a,b) together th ther counterpart for the foregn nterventon n ndutry determne the poltcal equlbrum level for both countre conumpton and trade polce. When conumpton and trade polce are avalable to the government, the poltcal equlbrum for each good nvolve the ue of both polcy nterventon hether conumpton of the good caue an externalty or not. When conumpton of good doe not caue an externalty, the equlbrum trade polcy cont of to part. The frt term n equaton (15b) the poltcal upport effect hch requre an mport tarff or an export ubdy hen the ndutry organzed and an mport ubdy or an export tax hen the ndutry not organzed. The econd term the term-oftrade effect. The frt term n equaton (15a) mrror the poltcal upport effect from the trade polcy equaton th oppote gn. Thu, the conumpton polcy ued to offet the conumpton dtorton arng from that part of the trade polcy that erve to atfy the lobbe. Hoever, due to term-of-trade conderaton, dometc conumer and orld prce are not perfectly equalzed. 68 Suppoe, for a gven commodty, the home country mpoe an mport tarff to protect t organzed mport-competng ndutry and the foregn country grant an export ubdy to t exportng ndutry. Then, home and foregn country ll apply conumpton ubde to ncreae dometc conumpton. Snce the jontly uncooperatvely appled conumpton ubde ll ncreae the orld prce, producer n both countre are better off hen the government have conumpton and trade polce avalable compared to the cae here they only have trade polce at hand. 69 When conumpton of a good generate an externalty, the econd term n equaton (15a) potve. Th envronmental effect requre a conumpton tax to capture the cot of an addtonal unt of conumpton n the home country. Whether the poltcal equlbrum conumpton polcy for good e a ubdy or a tax depend on the gn and magntude of the poltcal upport and envronmental effect. 68 In a mall country model dometc conumer prce ll equal orld prce hen the government ha dometc and trade polce avalable, and there no externalty (ee Schlech and Orden, 1996). 69 Gven the choce beteen a tarff, a producton and a conumpton polcy, any one polcy can be ubttuted by a combnaton of the other to. Thu, ung producton and trade polce lead to the exact ame outcome a ung conumpton and trade polce. 73

17 For a global conumpton externalty, the poltcal equlbrum trade polcy contan a thrd term hch negatve. Th global envronmental effect addree the effect of foregn conumpton on home conumer elfare. The effect negatve and requre an mport ubdy or an export tax to reduce conumpton n the foregn country through an ncreae n the orld prce of good e. The abolute value of th global envronmental effect ncreae th the home populaton ze, th the entvty of home conumer toard the envronment, and th the abolute value of the dervatve of foregn demand. Protecton for the home ndutry decreae th the abolute value of the dervatve of foregn mport demand. The latter capture the change n foregn conumer prce due to a change n the home trade polcy. Agan, the gn of equaton (15a) ambguou. When the government ha both polce avalable, t ue the trade polcy to addre the lobbe, the term of trade and the externalty generated by conumpton abroad. On the other hand, the conumpton polcy appled to counterbalance the conumpton dtorton from the trade polcy and to reduce the externalty caued by dometc conumpton. When the government have only conumpton polce avalable, the poltcal equlbrum polcy for the home country mplctly gven by ( I α) X M u ( N 1) ( 16) ( τ 1) = + γ ( a + α ) p ( X M ) p ( X M ) p Nu D τ p ( X M ) The poltcal upport effect requre a conumpton ubdy f the ndutry organzed and a tax f t not organzed. In a large-country cae, a conumpton ubdy ncreae the orld prce of good, and thu can be ued to ncreae the prce that dometc producer receve, beneftng organzed nteret group and hurtng conumer. The econd term the term-of-trade effect. It capture the reponvene of compote upply and take on a potve (negatve) value f the home country mport (export) good e. The thrd term n equaton (16) the envronmental effect, hch requre a conumpton tax to addre the dometc conumpton externalty. The fnal term drected at the externalty generated by foregn conumpton. It requre a conumpton ubdy hch lead to an ncreae n the orld and foregn conumer prce. Whether the equlbrum conumpton polcy a tax or a ubdy ambguou. Krutlla (1989) ha hon that n a large-country model the optmal envronmental tax for a local conumpton externalty hgher than the tandard Pgouvan tax f the country an mporter becaue a conumpton tax appled to mprove the term of trade. quaton (16) llutrate that th reult need not hold n the poltcal economy model: the poltcal upport effect requre a conumpton ubdy that counterbalance the term-of-trade and envronmental effect. 74

18 The equlbrum nterventon hen the government lmted to the ue of trade polcy mplctly gven by ( I α ) X M ( 17) ( θ 1) = ( a + α ) p M p θ M u ( N 1) D Nu D θ + γ. p M p θ M The poltcal upport effect requre an mport tarff or an export ubdy f ndutry organzed. The term-of-trade effect mple an mport tarff or an export tax. To reduce the externalty from dometc conumpton, the thrd term requre an mport tarff or an export ubdy. For a global conumpton externalty, the lat term n equaton (17) negatve and requre an mport ubdy or an export tax, hch ncreae the orld prce, and thu lead to a reducton n foregn conumpton and a decreae n the global externalty. Agan, the gn of the equlbrum trade polcy generally ambguou and depend on the gn and magntude of all four effect. Smlar to the mall-country model, n the large country-model t ambguou hether conumpton polcy alone or trade polcy alone lead to hgher envronmental qualty. In the large-country model, the term-of-trade effect ll affect hether trade polcy alone or conumpton polcy alone lead to hgher envronmental qualty. When the good that caue the conumpton externalty mported, for the trade polcy and the conumpton polcy, the termof-trade effect renforce the (local) envronmental effect nce both effect requre an mport tarff or a conumpton tax, repectvely. When the good that caue the conumpton externalty exported, competng the to effect oppoe each other for the trade polcy and the conumpton polcy. In th cae, the term-of-trade effect for the trade polcy requre an export tax hle the envronmental effect requre an export ubdy. For the conumpton polcy, the term-of-trade effect requre a conumpton ubdy hle the envronmental effect requre a conumpton tax. Thu, nce the relevant term-of-trade effect for the conumpton polcy n equaton (16) and trade polcy n equaton (17) are evaluated at dfferent pont, no general concluon can be dran a to hether the term-of-trade effect ncreae or decreae the chance that trade polcy alone ll lead to hgher envronmental qualty than conumpton polcy alone. Hoever, lke n the cae for the producton externalty, hen the foregn mport demand elatcty contant, or hen the equlbrum mport under the conumpton and the trade polcy are dentcal, the term-of-trade effect ll ncreae (decreae) the chance that trade polcy alone ll lead to hgher envronmental qualty than conumpton polcy alone hen the good that caue the externalty mported (exported). When government et ther dometc and trade polce noncooperatvely, the home government can affect the externalty generated by producton or conumpton n the foregn country only ndrectly, through the term of trade. The analy for the noncooperatve cenaro ho that n th cae, polce drected at the home and foregn part of the externalty generally oppoe each other. 75

19 4.4. Producton xternalty under Cooperaton In the prevou cenaro the tructure of dometc and trade polce a derved hen government of to countre chooe polce noncooperatvely. The poltcal equlbrum polce erved the government to atfy organzed dometc lobbe, to explot nternatonal market poer, and to addre a local or global externalty. In ettng ther polce noncooperatvely, government mpoe cot on each other. Frt, mprovng one country term of trade oren the term of trade of the other country. Second, n cae of a global externalty, the producton or conumpton decon n one country ll affect the utlty derved from the envronment n the other country. Thee nternatonal term-of-trade and externalty pllover ll be taken nto account hen government et ther polce cooperatvely, unlke n the noncooperatve cae. In th ecton t aumed that dometc and trade polce are a the outcome of multlateral negotaton beteen the home and the foregn government. Aumng that the government negotaton over dometc and/or trade ntrument lead to Pareto-effcent outcome for the government objectve, the tructure of the elected polce ll be characterzed. 70 The government are aumed to negotate multaneouly over dometc and trade polce and the lobbe make ther contrbuton chedule contngent on the outcome of the negotaton, that on τ, τ, θand θ. ffcency requre that the home government could not be made better off thout makng the foregn government ore off. Hence, the polcy vector have to maxmze the eghted um ( 18) AG+ AG = A[ C ( τθτ,,, θ) + aw( τθτ,,, θ)] + A[ C ( τθτ,,, θ) + a W ( τθτ,,, θ)] here G the home government hare of the jont urplu, G the foregn country hare, A= ( α + a) and A = ( α + a ). 71,72 70 A partcular barganng oluton could be mpoed to reolve the dtrbuton of the urplu beteen the to government from cooperaton compared to noncooperaton. Outcome could be derved that ould be equvalent to Groman and Helpman (1995), ho apply a modfed veron of the Rubnten barganng oluton to characterze ntergovernmental tranfer. 71 Multplcaton by A and A repectvely neceary to enure that the home and foregn government objectve are meaured n the ame unt. Appendx A cover the more general cae here an ntergovernmental tranfer ncluded. 72 Snce th paper not concerned about ho the jont urplu from cooperaton dvded among the government, tranfer payment are neglected becaue they do not affect effcency of the outcome (ee Appendx A). 76

20 In the frt tage of the game, home and foregn lobbe et ther contrbuton chedule noncooperatvely, and n the econd tage, the home and foregn government negotate multaneouly over producton and trade polce. The neceary condton for the cooperatve outcome are not explctly gven, nce they are a traghtforard extenon of the noncooperatve cenaro 73. Aumng that the contrbuton chedule are dfferentable around the (nteror) equlbrum pont, the polce n the cooperatve equlbrum mut atfy ( 19) ( ( τ, θ, τ, θ ) + ( τ, θ, τ, θ ) ) + β β ( τ θ τ θ τ θ τ θ β β ) A W a W A W (,,, ) + a W (,,, ) = 0, here no β = τ, τ, θ, θ. Frt conder the cae, here the producton of a good mght generate an externalty and the government negotate multaneouly over producton and trade polce. From the frt order condton (19) the home and foregn producton polce for ndutry (ee Appendx A) are θ ( I α ) X ( I α ) X τ ( 20a) ( τ 1) = ( a+ α ) px ( a + α ) p ( θ D + θ M ) 2 θ p X 2 τ ( τ 1) p ( θ D + θ M ) p θ M + [( θ 1) ( θ 1)][ ( ) ] p θ D + θ M θ Nu Nu X X X τ γ p p ( θ D + θ M ) θ Nu Nu X X X τ γ γ p p ( θ D + θ M ) ] 73 See Groman and Helpman (1995, pp. 696) for detal. 77

21 θ ( I α ) X ( I α ) X τ ( 20b) ( τ 1) = ( a + α ) p X ( a + α ) p ( θ D + θ M ) 2 θ p X 2 τ ( τ 1) p ( θ D + θ M ) p θ M + [( θ 1) ( θ 1)][ ( ) ] p θ D + θ M θ N u Nu X X X τ γ p p ( θ D + θ M ) θ Nu N u X X X τ γ p p ( θ D + θ M ) X here M = D X τ and M = D. τ A Groman and Helpman (1995, p. 698) pont out, the frt order condton for the home and foregn trade ntrument are lnearly dependent. Dometc prce are homogenou of degree zero n θ and θ, o the allocaton of reource n the to countre and the jont elfare of the government depend on the rato of the trade polce only, not on ther repectve level. The frt order condton for the home (or the foregn) trade polcy lead to ( 21) ( I α ) X ( I α ) X ( θ 1) ( θ 1) = ( a+ α ) p τ M + ( a + α ) p τ M px p X ( τ 1) ( τ 1) p τ M + p τ M Nu X X + p τ M Nu X X Nu X X p τ M Nu X X + γ pτ M p τ M quaton (20a,b) and (21) determne the home and foregn country producton polce and the dfference beteen ther trade polce, ( θ 1) ( θ 1 ). Subttutng th dfference nto the expreon for the producton polce (20a) and (20b) and collectng term yeld mplct expreon for the home and foregn country producton polcy (ee Appendx A) ( I α ) X ( 22a) ( τ 1) = ( a + α ) p X Nu δ p X γ N u p X. 78

22 ( I α ) X ( 22b) ( τ 1) = ( a + α ) p X N u p X γ Nu p X. The poltcal equlbrum producton polce only contan poltcal upport effect, hen there no global externalty and the government cooperate on producton and trade polce. Whle n th cae, the noncooperatve producton polce n equaton (22a,b) have the ame tructure a the noncooperatve producton polce n equaton (10a,b), the polcy level generally dffer nce the expreon are evaluated at dfferent pont. For a global externalty, an addtonal global envronmental effect addree the cot of an extra unt of output on the other country redent and requre an output tax. Subttutng equaton (22a,b) nto equaton (21), yeld an mplct expreon for the dfference or rato of the trade polce ( 23) ( θ 1) ( θ 1) = 0. quaton (23) ugget that n the cooperatve poltcal equlbrum the government apply ther trade polce at the ame rate. Snce the dometc conumer and producer prce are homogenou of degree zero n both trade polce, equaton (23) mple that the allocaton of reource n the to countre the ame a under free trade. 74 Unlke n the noncooperatve cenaro, expreon reflectng term-of-trade conderaton do not appear n the expreon for the cooperatve equlbrum polce. When government negotate over producton and trade polce they ue producton polcy to addre organzed lobbe, local and global externalte. In the noncooperatve cenaro, producton 74 The level of the trade polce, hoever, ll affect the dvon of the urplu from cooperaton. Suppoe the home country double t mport tarff and the foregn country double t export ubde. Snce the orld (offhore) prce homogenou of degree -1 n θ and θ, doublng both polce ll decreae the orld prce of good by 50 percent. Such a polcy change leave dometc reource allocaton the ame, but the to government are affected aymmetrcally. The home country tarff revenue double hle the foregn government no ha to double t ubdy payment. Snce change n government payment exactly offet each other, an equproportonate change n ther trade polce equvalent to a drect tranfer from one country (here foregn) to the other country (here home). Thu the actual trade polcy level ould have to be determned through a pecfc barganng procedure lke n Groman and Helpman (1995) and the level of the trade polce depend on the relatve barganng poer of the countre. 79

23 polcy only drected at the lobbe and a local externalty hle the trade polcy ued to explot nternatonal market poer and to addre a global externalty. 75 Snce the government ue producton polce to atfy ther organzed pollutng ndutre, envronmental qualty ll be loer than under a ocally optmal cooperatve tax, ndependent of hether the good exported or mported, provded that the margnal dutlty from the externalty doe not decreae too fat n the output prce. 76 Next, the determnant of level and dfference n ndutry protecton acro countre a meaured by dometc output prce ll be analyzed. 77 When there no externalty, the ndutry th the hgher poltcal upport effect granted the hgher output prce. Thu poltcally poerful ndutre n both countre are granted hgh level of protecton. Hoever, nce producton polce alo affect the term of trade, protecton for the home ndutry not ndependent of the poltcal poer of t foregn counterpart. An ndutry uffer from the poltcal trength of the ame ndutry abroad, becaue hgher producton ubde lead to a loer orld prce. If there an externalty, the output prce ll be loered by the envronmental effect. For a local externalty, ndutry protecton ll be loered more n the country th the hgher populaton, the hgher entvty toard the envronment and the--at the margn--more pollutve ndutry. When the externalty global, the um of the envronmental effect the ame for the home and foregn producton polce, and the only dfference n output prce are from dfferent poltcal upport effect. When government have only producton polce avalable the cooperatve outcome are the ame a n equaton (22a,b). Thu, the tructure of the poltcal equlbrum polce the ame, hether negotaton take place over trade polce and producton polce together or only over producton polce. The level hoever, are generally dfferent, nce the choen trade polce ll dffer beteen the noncooperatve and cooperatve cenaro. In th model, hen only producton polce are avalable, or hen producton and trade polce are avalable, the cooperatve outcome ll be the ame. 75 To dra concluon hether ndutre are better off under cooperaton compared to noncooperaton, more pecfc aumpton about the demand and upply functon are neceary, nce the equlbrum polce can only be gven mplctly. For example, t can be hon that for contant upply and demand elatcte and hen n the noncooperatve equlbrum, the mportng country mport demand le elatc than the exportng country mport demand, cooperaton lead to hgher output prce for exportng ndutre than noncooperaton (Appendx C provde a proof of th propoton). Thu rather retrctve aumpton have to be made to ho even ntutvely appealng reult. 76 For a proof ee the mall-country model n chapter quvalently envronmental protecton could be condered. Becaue of the ay the producton externalty modelled, hgher ndutry protecton automatcally mean loer envronmental protecton and vce vera. 80