ABSTRACT
This chapter analyses the welfare effects of pollution regulation when heterogeneous firms and countries with different sizes trade. It focuses on the literature is to set a theoretical model in which country size is relevant in the setting of environmental regulation in the presence of trade. The chapter assumes that there is one firm in each country and they are heterogeneous because they have different cost structures. Environmental degradation comes as a by-product of production. It uses a reciprocal dumping model with pollution quota to determine the effect of the environmental policies on the welfare of each country under non-cooperative and cooperative settings. The chapter develops a model of Cournot oligopoly, of partial equilibrium under conditions of reciprocal dumping between two asymmetric countries. It considers one firm located in each country producing for local consumption and to export.
