Oligopolistic Competition, Asymmetric Trade and Pollution Taxes

Abstract

This study develops a partial equilibrium model for asymmetric trade between two heterogeneous companies located in different countries under reciprocal dumping and oligopolistic competition conditions. All governments must implement a series of strategic environmental policies with the objective of maximizing the wellbeing of the country, considering company utility, consumer benefit, government income obtained through the levying of pollution taxes, and the social cost of polluting. It can be determined that, if the disutility of polluting is considerably high, governments should levy taxes on pollution. On the other hand, they could also opt not to tax pollution, provided that there is compliance with certain additional conditions that depend on other related parameters, such as marginal production costs and the scale of the companies’ production.