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Essays on political economy in trade and environment Kawahara, Shinya

Abstract

This thesis consists of three essays that contribute to international trade and environmental economics. The first essay addresses the question of why some countries fail to adopt environmental policies that are sufficiently strong, while others adopt policies that are too stringent. Constructing a political economy model in which voters face uncertainty due to types of politicians and the risk of environmental damage, it demonstrates that there is an equilibrium in which a politician uses a weaker environmental policy rather than efficient direct transfers for redistribution. It also shows that there is an equilibrium in which a stricter environmental policy can be implemented by a politician who has no incentive to make transfers. Then, the latter equilibrium in which a too stringent environmental policy emerges is shown to be more plausible unless the incumbent’s initial reputation is sufficiently strong. The second essay questions how one country’s decision to liberalize trade affects a political economic structure that determines environmental policy in other country. By constructing a political economy model with endogenous lobby formation, it shows that unilateral tariff reductions (UTRs) by a large country importing a dirty good will generate an industry lobby that demands a lax environmental regulation in a small country exporting that good. Then, it shows that for a pre-existing lobby, the UTRs cause the formation of a lobby group that opposes initially distorted environmental policy in the small country. Numerical simulations show that the UTRs first cause the formation of industry lobby groups and further reductions of trade barriers will generate an environmental lobby in the small country. The third essay examines what the successful scenarios for the environmental policy reforms should look like when they have an impact on the terms of trade. By setting up a general equilibrium model of international trade that is extended to include environmental externalities, it characterizes and compares the welfare-improving reforms of environmental taxes and standards in a large open economy. It also considers the case in which there are multiple rather than single pollutants in the economy to examine how a reform of one pollutant affects other remaining pollutants.

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