AN OPEN-ECONOMY MODEL OF THE EFFECTS OF UNILATERAL ENVIRONMENTAL-POLICY BY A LARGE DEVELOPING-COUNTRY

In this paper, we pose the following question. Why is it that despite the universal recognition of the need for global environmental protection, developing countries have been lax in instituting stringent environmental regulations? Addressing this question from an economic standpoint, we show that there are plausible theoretical circumstances in which a large developing country can be worse off if it chooses to implement environmental policy in an uncoordinated fashion. The empirical dimension of this question is stressed and the key parameters - such as elasticities and marginal propensities to consume - which are germane to any policy discussion regarding this issue are identified. Second, we study - once again from the perspective of a large developing country - the possibility of using the domestic tax structure optimally to attain environmental policy objectives in a second-best environment. This scenario involves taxing pollution indirectly, by using product taxes. Finally, keeping the empirical dimension of the question in mind, we show how to compute optimal externality correcting taxes. These taxes are primarily a function of different kinds of elasticities.