Subsidy to Envirnmental Industry in a North-South Model of Trans-Boundary Pollution, Trade and Migration

In several countries the reduction in domestic emissions of pollutants is at least partly compensated by an increase in trans-boundary pollution from neighboring countries with less strict environmental regulations. In this paper we build a simple North-South model of trade where the manufacturing plants which generate pollution are located in a developing country and we analyze the effects of a subsidy program to pollution abatement industry located in the North. We find that, contrarily to common intuition, the subsidy to the pollution abatement equipment industry might reduce welfare in the North when the efficiency of the pollution abatement technology is already relatively high and when the wage gap between the North and South is high. In addition we find that international migration might have a positive impact on improving the environmental stock and welfare in the North and might be a more efficient and less distortive way to address the trans-boundary externality.