Unilateral Emission Standards, Quality of Vertically Differentiated Products, and the Global Environment

Employing an environmentally-differentiated products model with heterogeneous consumers in terms of environmental consciousness, this paper examines the effect of a unilateral change in a home emission standard on the qualities of products, aggregate emissions, and welfare of both home and foreign countries. When firms compete with each other in a Cournot fashion, as the home emission standard becomes stricter, aggregate emissions of both domestic and foreign countries decrease, if a firm which produces a gdirtier producthf supplies the same product to both domestic and foreign markets. On the other hand, if the firm supplies different products in environmental features to different markets, a stricter emission standard by the home government increases aggregate emissions of the foreign country. Even in the Bertrand duopoly case, the effects of a stricter emission standard on both countries could be different from each other.