Cooperative Pollution Quotas with Transboundary Pollution in Integrated Markets

In an integrated market with trade, two heterogeneous polluting firms, each located in one country, compete in an oligopolistic setting in the presence of transboundary pollution. Each government must consider the effect of environmental policies set in both countries to evaluate the impact of these policies on local producers, consumer surplus and pollution disutility. We analyse the case of non-cooperative and cooperative pollution quotas. Both strategic policies generally depend on marginal cost for abating pollution, marginal pollution disutility and technical costs. A large marginal pollution disutility means a strict pollution policy. The non-cooperative pollution quota set by one country is independent of the policy set by the other country. On the other hand, the cooperative policy, a sovereign policy, considers the impact of local pollution on the welfare of the other country and penalises the inefficient pollution abatement firm. JEL: F18, F64, Q56