Environmental Policy in Open Economies

International trade is introduced in a model of international environmental problems when use of environmental services are rival. In the model, countries trade conventional goods that have a polluting production process and eco-services that are polluted. The problem is analyzed in a two-country, two-good, general equilibrium model for a benchmark small economy, a small regional economy and a large economy. It is founded that large economies exploit their market power through a terms of trade effect that may result in an increase or decrease of their own emission levels. Furthermore, the emission levels of large economies can be strategic substitutes or strategic complements, depending on how emission levels affect world market prices and how environmental policy affects the supply side and the demand side of the world market. As well, it is found that a small regional economy may increase or decrease emissions in response to an increase in the relative price of eco-services