RECIPROCAL DUMPING AND ENVIRONMENTAL POLICES
In a reciprocal dumping model of trade we analyse the effect of environmental policy reform on welfare in the presence of unemployment and repatriated profits. Pollution quota, used by the government in each country, restricts the local production and reduces the social harmful pollution. However, this quota is a barrier of trade which inhibits the employment and consumers surplus benefit. Bearing in mind this, both countries agree an infinitesimal and proportionate uniform reduction in pollution quota. In both cases global welfare will increase if marginal disutility of pollution is larger than the cost for abating pollution. The effect on each country will depend on the market size and marginal technological costs. Under the same conditions, when both countries agree harmonisation in pollution quotas the global welfare increase but the effect on the welfare of each country will be different.