Premium
Environmental regulation and love for variety
Author(s) -
Echazu Luciana,
Heintzelman Martin
Publication year - 2019
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/roie.12382
Subject(s) - monopolistic competition , economics , outcome (game theory) , environmental regulation , variety (cybernetics) , competition (biology) , strategic interaction , free trade , product (mathematics) , industrial organization , liberalization , open economy , strategic complements , international economics , international trade , microeconomics , public economics , market economy , monetary economics , ecology , monopoly , geometry , mathematics , artificial intelligence , computer science , exchange rate , biology
Using a model of monopolistic competition, we examine the relationship between intra‐industry trade and environmental regulation. The decisions on emission standards set by each country show strong strategic interactions. In closed economies regulations act as strategic substitutes, and in equilibrium there is under‐regulation relative to the cooperative outcome. Trade liberalization may lead to stricter or laxer environmental standards, depending on the consumers’ preference for product variety. In addition, we show that with open trade environmental regulations may act as strategic complements and countries may set environmental standards that are as strict (or stricter) than those in the cooperative outcome.