Trade, Pollution Transfers and Spillovers: Conditions for Welfare Outcomes

Abstract

I use a model of indirect utility and compensated demand functions to analyze conditions for welfare effects when countries engage in trade involving a pollutant. The paper questions whether there is a transfer problem in such a trade and what conditions could set the stage for welfare effects. The results show that, countries’ (both trade partner’s and non-participants’) welfares increase not necessarily with distance from the pollution generating location (country) but with their marginal propensities to consume the good, substitutability in the good in question, the type of good (normal, Giffen and or inferior) and the spatial separability of the pollutant.