ABSTRACT
Environmental disruption will reduce the overall benefits to society from trade, and a priori, it cannot be ruled out that the environmental losses may overcompensate the conventional gains from trade. The country reduces the output of the pollution-intensively produced commodity, the conventional gains from trade are enhanced by an improvement in environmental quality and the country exports pollutants via trade to the rest of the world. Environmental policy makes the production of the pollution intensive commodity more costly. The improvement in environmental quality is only possible by reducing the gains from trade. The gains from trade may be reduced and environmental quality will rise. There will be an overall welfare gain from environmental policy as long as marginal social costs of producing the commodity are higher than the marginal value of the commodity in consumption or as long as the emission tax is lower than marginal environmental damage.
