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Environmental policy, comparative advantage, and welfare for a developing economy

Published online by Cambridge University Press:  02 October 2006

HAMID BELADI  and
CHI-CHUR CHAO
HAMID BELADI
Affiliation:
Department of Economics, University of Texas at San Antonio, San Antonio, TX 78249, USA. E-mail: hamid.beladi@utsa.edu
CHI-CHUR CHAO
Affiliation:
Department of Economics, Chinese University of Hong Kong, Shatin, Hong Kong Department of Economics, Oregon State University, Corvallis, OR 97331, USA. E-mail: ccchao@cuhk.edu.hk
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Abstract

This paper investigates the effects of pollution taxation for a dual developing economy with a separate abatement sector. Due to the real rigidity of the urban wage, pollution taxes raise the cost of the urban good and hence its relative price. This suggests that because of flexible rural wages, the developing economy tends to have a comparative advantage in the rural good which may be less polluting. Moreover, the higher price of the urban good worsens the urban unemployment ratio. The optimal tax on pollution is thus lower than the marginal environmental damage to the economy.

Type
Research Article
Information
Environment and Development Economics , Volume 11 , Issue 5 , October 2006 , pp. 559 - 568
Copyright
2006 Cambridge University Press

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Footnotes

We would like to thank an associate editor and three anonymous referees for many helpful comments and suggestions. The work described in this paper (for Chao) was supported by a grant from the Research Grants Council of the Hong Kong Special Administrative Region, China (Project No. CUHK4110/04H).