ABSTRACT
Environmental effects on welfare and gains from North-South trade are modeled by adapting the traditional Heckscher-Ohlin framework to account for pollution generated from production and affecting health and utility. The conflicts and potential for conflicts between trade and environmental policies, especially the effects of environmental protection on trade patterns and gains from trade, have also become a North-South issue. The chapter aims to develop numerical examples to further clarify the conceptual model and its implications. Countries that experience gains from environmental taxes that improve their terms of trade may be encouraged to overtax the polluting factors if the incremental losses from overtaxing are smaller than the gains from changes in the terms of trade. The effects of environment on trade and welfare are analyzed in a modified general equilibrium Heckscher-Ohlin framework where health appears as an argument in a quasi-homothetic utility function.
