A Dynamic Analysis of Protection and Environmental Policy in a Small Trading Developing Country

This paper studies an intertemporal model of protection and environmental policy in a small trading developing nation (DN). The DN government protects the polluting and the import competing sector of the economy with a tariff. The output and employment effects of three pollution taxes are examined. These taxes are based on alternate suppositions about the DN government's ability to commit to its proclaimed policy. First, the taxes are delineated, the dependence of these taxes on the tariff is analyzed, and it is shown that, in general, an activist environmental policy is called for, irrespective of the length of time to which the government can commit to its proclaimed policy. Second, a situation is identified in which the conduct of environmental policy unambiguously raises welfare. Finally, it is shown that the dynamic inconsistency of certain optimal programs can prevent the DN government from accomplishing its employment and environmental objectives