ABSTRACT
This chapter analyses how the social welfare levels of the countries and environmental pollution levels change when the countries determine a uniform cooperative government policy through an environmental pollution agreement. It also analyse the first stage game where North Firm decides where to locate. The chapter focuses on how location choice of a firm from a developed country directly and indirectly depends on exogenous factors, such as labour intensity and marginal damage of pollution in an environment where government policies are chosen observing the location choice. In order to understand these direct and indirect effects, one should note that, when labour intensity is high, the employment effect of production is more substantial, thus, the host country's policies change accordingly and thus, labour intensity indirectly affects location choice. The chapter describes the basic model and the solutions of the output choice and government policy choice stages are given and discuss the solution of the location choice stage.
