There is a substantial literature on the economics of cross-border pollution. For
example, Merrifield (1988) in a two-country general equilibrium model with
internationally mobile goods, capital and pollution flows, examines the welfare effects of
selected abatement strategies (e.g., production taxes, abatement equipment standards).
Ludema and Wooton (1994) develop a two-country model with production generated
pollution in the exporting country and cross-border pollution externalities. Within this
framework, they examine the welfare effects of environmental policies (e.g., adoption of
pollution abating technology) vis-a-vis trade policies (e.g., reduction of import tariffs)
when the two countries either can non-cooperatively restrict trade, or when they are
bound by a free trade agreement. Ludema and Wooton (1997) extend their previous
theoretical framework by incorporating administrative costs and asymmetric information
in pollution abatement (known only to the exporting country), in order to examine the
welfare implications of cooperative and non-cooperative trade and environmental
policies. Copeland and Taylor (1995) consider a model of a world economy consisting of
two regions --North and South-- each composed of many countries. Governments set
national pollution quotas treating the rest of the world’s pollution as given. They
demonstrate, inter alia, that reduction in pollution by a coalition of countries may be
Pareto improving and that income transfers tied to pollution reduction can be welfare
enhancing. On the other hand, untied income transfers may not have an impact on global
pollution, terms of trade and levels of national welfare. Copeland (1996), in a two
country model of cross-border pollution, examines the effectiveness of a “pollution
content tariff”, i.e. an import tariff whose magnitude varies with the amount of pollution
generated by the production of the imported good.