This paper presents a general-equilibrium model of a small open economy, in which the production process of private goods generates pollution, and the government finances the production cost of a public consumption good through revenue from tariffs and pollution taxes. Since a variety of distortions, including pollution, trade protection, and public production, exist, a change in tariffs and/or environmental taxes affects economic welfare, both directly and indirectly. Taking these effects into account, the conditions for welfare-enhancing, piecemeal policy reform are derived.
- Public production
- Trade and environment
- Welfare-enhancing policy reform
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