We examine the welfare effects of price and quantitative restrictions of trade and environment in an open economy. By extending the model developed by Copeland (1994) to include endogenous determination of terms of trade, we characterize the welfare-improving reforms of tariffs, import quotas, pollution taxes, and pollution quotas. First, we show that a reduction of all tariff distortions proportional to the degree of tariff distortion improves a large country’s welfare if all the industries protected by tariffs are damage-intensive with respect to pollutants regulated by pollution taxes. Second, we characterize the conditions under which relaxing an import quota improves welfare. Third, we show that a reduction of all pollution tax distortions proportional to the degree of pollution tax distortion improves welfare under the same conditions as in tariff reforms. Finally, we characterize the conditions under which tightening a pollution quota improves welfare.
経済学季報 63 (2), 31-50, 2013-11-05