STRATEGIC ENVIRONMENTAL-POLICY AND INTERNATIONAL-TRADE

This paper demonstrates that governments may have incentives to impose weak environmental standards on industries that compete for business in imperfectly competitive international markets, where 'weak' means that the marginal cost of abatement is less than the marginal damage from pollution. However, such an intervention is not as efficient as an export or R&D subsidy in improving competitiveness, and depending on the form of competition and market structure, it may instead be optimal for governments to impose strong environmental standards, where 'strong' means that the marginal cost of abatement exceeds the marginal environmental damage.