Abstract:
A multihousehold economy with production/consumption externalities, environmental taxation, and governmental production of pure, nonexclusive and nonrivalrous public goods is assumed. The production of public goods is financed from environmental tax revenue. Globally valid necessary and sufficient conditions for gains from international trade are derived and interpreted. A simple yet general environmental policy rule ensuring trade gains is put forward. The effect of international trade on the personal distribution of income of households is also considered. If the simple policy rule is followed, it is shown that the move to free trade represents a Pareto improvement without lump sum compensation by the government. The relevance of the double dividend debate for the achievement of trade gains is discussed.
