Economics of the Environment: Theory and Policy by Horst Siebert

Author:Horst Siebert [Horst Siebert]
Language: eng
Format: epub, pdf
Published: 2013-08-22T16:16:00+00:00

National Environmental Policy and Comparative Advantage

Comparative price advantages of the home country for commodity 1 can be explained by the following factors: a more favorable endowment in the home country of the factor that is intensively used in the production of commodity 1, such as capital, labor, or raw-material endowment; a more favorable productivity in the home country in the production of commodity 1 (that is, advantages in technical knowledge which are based on technological, organizational, and management systems as well as on the capabilities of the workforce), and a relatively lower demand for commodity 1 in the home country.

Environmental abundance or scarcity is also a factor which influences the comparative price advantage of a country. Assume that the home country pursues an environmental policy because the given environmental quality is not acceptable. Assume further that an emission tax is levied. Then we know from Eq. 7.13 that, under some conditions, especially when HHF1 >HHF2, we have dp/dz > 0. In a closed economy, the relative price of the pollution-intensive commodity increases if an environmental policy is undertaken. This means that the comparative price advantage of the home country is reduced. The competitive position of the country is negatively affected, and exports will be reduced.

The Heckscher-Ohlin theorem can be extended to trade with pollution-intensive commodities. The Heckscher-Ohlin theorem states that given identical demand and identical technologies among countries, a country richly endowed with a factor of production will export that commodity which heavily uses the abundant factor. Let the home country be richly endowed with environmental services. Let z represent the correct indicator of environmental scarcity; that is, assume that environmental policy finds the ideal or correct shadow price. If we assume that the home country is richly endowed with environmental services, we can express this situation as z < z*, where z is the emission tax of the home country and z* is that of the foreign country. Because dp/dz> 0, we have p(z) < p* (z*) if z < z*, so that the environmentally rich country will export the pollution-intensive commodity. The country with limited environmental attributes will export the commodity which is not pollution-intensive.

Figure 11-1 explains this argument. AGBCHrepresents the transformation space of the home country as it was derived in Fig. 3-3. In order to keep the diagram simple, we do not show the transformation space of the foreign country. Rather, we indicate its production block XYZ where environmental quality is not explicitly considered for the foreign country. Furthermore, the production block is drawn scaled down for simplicity. Note that the production block of the foreign country XYZ lies horizontally in the UQ1 Q2 space.

We want to analyze different cases. First, assume that no environmental policy is undertaken and that the home country commences trade. Point F denotes the autarky situation in which relative prices diverge so that p < p*. In order to interpret the diagram, we assume that the home country is a small country so that the foreign country dictates the relative price p*.

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