Creation and Destruction of Comparative Advantage by Public Investment in the Transport Infrastructure of Transit Economies and by Environmental Taxes

In this paper we show conditions under which the accumulation of public infrastructure capital over time may create the comparative advantage of the production of transport services and destroy that of the production of goods in a market equilibrium of a transit economy. We also show conditions under which it will not change comparative advantage. Moreover, we also show the conditions under which an environmental tax on pollution from transport will shift the specialization back to the production of goods. In the model used, specialization is determined by: the productivity of the sectors; the transit volume; the taxes raised for the use of roads; the world market prices of goods and transport services; and environmental taxes. Gains from trade are analysed and comparative-static properties of globalization and tax policy are discussed.