Emission Tax, Subsidy to Input of the Pollution Abatement Equipment and Intenational trade

Abstract

In this paper, we construct the two sector model which consists of sectors producing a final good and a pollution abatement equipment, then, we examine the effects of an emission tax and a subsidy to input of the equipment (input subsidy). The pollution abatement equipment is the intermediate goods that are not used for the production activity but are used for the abatement activity in the final goods sector.
Hence, if the final goods sector is capital intensive relative to the equipment sector, we can derive the following results: (a) A raise in the emission tax makes the domestic products of the equipment increase and its imports decrease. On the other hand, a raise in the input subsidy decreases the domestic production and increases its imports.(b) A raise in the emission tax definitely decreases the total pollution in the country concerned. However, a raise in the input subsidy may increase the total pollution under some conditions. Moreover, in such the case, (c) if the emission tax dose not fully internalize the external diseconomy, an introduction of the input subsidy may worsen the domestic welfare.