A Bertrand Model of Trade and Environmental Policy in an Open Economy

We study environmental policy in a two nation world in which there is strategic behavior by governments and polluting firms. Two issues are analyzed. First, the conditions under which the conduct of unilateral environmental policy by a nation in a Bertrand game will immiserize that nation, are specified. Second, the effects of pollution control by means of various price control instruments in a Bertrand game in which governments care about world pollution but polluting firms do not, are studied. The existence of reasonable theoretical circumstances in which the conduct of unilateral environmental policy is immiserizing, is documented. Finally, it is shown that when the two nations are similar, a joint policy instrument is the most useful pollution control instrument. In contrast, when the two nations are dissimilar, it is shown that there is no unambiguous answer as to which instrument is the most useful