Achieving environmental goals in a world of trade and hidden action: the role of trade policies and eco-labeling

Importing countries often resort to trade policies and consumer actions in order to reduce negative environmental impacts of the products they consume. Traditionally, these policies were non-discriminatory, i.e., they treated all imports equally, without considering the actual damages caused by the product. More recently, there is a trend towards process-discriminatory policies which attempt to discriminate against environmentally unsound imports while encouraging sound alternatives. We develop a theoretical model of the consuming country's optimal trade policy, allowing for asymmetric information and costly monitoring, and analyze what type of policy is preferable under what conditions. (C) 2004 Elsevier Inc. All rights reserved.