North-South Trade, Property Rights and Environment

Transcription

1 Version 1.2 (Preliminary) North-South Trade, Property Rights and Environment Kenzo Abe Osaka University and University of British Columbia ABSTRACT This paper examines the structure of comparative advantages and gains from trade in the North-South trade model with a renewable environmental resource. The North has well-defined property rights on the environmental resources, but the South treats them as commons. We will show that the South has a comparative advantage in the environmentally intensive good with a lower relative demand for it, but the North has a comparative advantage in it with a higher relative demand. In addition, the North necessarily gains from trade if she has a comparative disadvantage in the environmentally intensive good. The South will gain from trade in the case of a medium relative demand. Address: Facutly of Commerce and Business Administration University of British Columbia Main Mall, Vancouver, BC V6T 1Z2 CANADA Fax: (604) kenzo.abe@commerce.ubc.ca (Osaka office) Graduate School of Economics, Osaka University 1-7,Machikaneyama, Toyonaka, Osaka JAPAN Fax: k-abe@econ.osaka-u.ac.jp * Do not quote without author s permission.

2 North-South Trade, Property Rights and Environment 1. Introduction Recently it is widely recognized that international trade has a close link with environment. Many goods are procduced by using environmental resources like forests and fisheries, and such environment-related goods are traded in domestic and international markets. Some argue that trade liberalization increases production of the environment-related goods and leads to degradation of environment. The environment-related goods are usually undervalued in a market system without appropriate environmental policies since they have some externalities. Countries with a larger stock of environmental resources, or those lacking in appropriate environmental policies, would have a lower price on the environment-related goods and would have a comparative advantage in them. After opening of trade, or trade liberalization, the countries that have a comparative advantage in the environment-related goods increase production of them. Then, international trade enhances the exploitation of the environmental resources, which in turn degrade environment in the country. This implies a trade-off between free trade and preservation of environment. Responding to such concerns on trade and environment, some formal studies on it have been developed so far. In this paper we focus on renewable environmental resources whose effects do not spillover to foreign countries, although there are the other frameworks of analyzing trade and environment. 1 Chichilniski (1994) investigated trade patterns and trade gains in a model incorporating environmental resources. She payed attention to the difference in the system of property rights between a developed country (the North ) and a developing country (the South ). In the North the environmental resources are private-property ones, but in the South they are commonproperty resources or commons. Due to the common property system, the environmental resources are extracted excessively in the South. Thus, the South has a comparative advantage in the environmentally intensive goods, and opening of trade increases the extraction of the environmental resources. Chichilniski (1993) considered the dynamic version of the model, and derived similar results as in the static model. Brander and Taylor (1997b) examined those issues in a different context. They considered trade between the consumer country where the profit maximizing firms extract the environmental resources and the conservationist country whose government maximizes the steady state utility. They showed that the determination of trade patterns depends on 1 Copeland and Taylor (1994) examined the North-South trade and the environment in a model that incorporates domestic externalities in consumption. Papers on transboundary externalities include Markusen (1975a, 1975b), Copeland (1996), and Copeland and Taylor (1995, 1999). 1

3 the strength of the relative demand, and both countries gain from trade when they face a strong relative demand for a resource good. Brander and Taylor (1997a, 1998) also examined trade patterns and gains from trade in the context of open-access renewable resources. 2 This paper re-examines the structure of comparative advantages and gains from trade in the dynamic version of Chichilniski s model. First, we will show that the structure of comparative advantages depends on the strength of the relative demand, and the trade pattern predicted in the short-run may be reversed in the long-run. Secondly, the North necessarily gains from trade in the case of the lower demand for the environmentally intensive good, and the South will gain from trade in the case of a medium demand for it. This paper is organized as follows. Section 2 presents the model of this paper. Section 3 gives the relation between the relative price of the final goods and the extraction of the environmental resources in the steady state. Section 4 examines the structure of comparative advantages between the North and the South. Section 5 deals with gains from trade in both countries. This paper concludes in the final section. 2. The model 2.1. The renewable resource There are two countries called the North and the South. Both countries own an environmental resource pool, which is a renewable resource. R(t) represents the stock of the environmental resource at time t. The growth rate of the environmental resource depends on the natural growth rate of the resource and the amount of extraction. The natural growth rate of the environment depends on the stock of the resource. We denote the natural growth function as G(R). It is assumed to be the same in both countries. Then, the change in the stock of the environmental resource is given by dr(t)/dt = G(R(t)) E(t) (1) where E(t) is the extraction, or the production of the environmental resource at time t. We specify the function of the natural growth rate as G(R) =βr(1 R/K), (2) 2 Markusen (1976), McRAE(1978), and Lopez (1994) examine the resource allocation and welfare in the presence of the envrionmental resources, but they employ the intertemporal utility fucntion. 2

4 where β and K are constants. 3 Without congestion, the resource grows at the rate of β. As the stock of the resource increases, congestion makes the growth rate lower. If R reaches K, the resource stops growing. Harvesters extract the environmental resource by using labor, but the stock of the resource affects the amount of extraction. The harvesting production function of the environmental resource is assumed to be homogeneous of degree one and quasi-concave in labor and the stock of the environmental resource. 4 We denote it as E = F (L E,R)=f(l E )R, (3) where l E = L E /R and f(l E )=F (l E, 1). We assume that the production function is the same in both countries. Then, the change in the stock of the environmental resource is expressed as dr(t)/dt = βr(1 R/K) f(l E )R. (1 ) Eq. (1 ) implies that l E affects the stock of the environmental resource at the steady sate The extraction of the environmental resources The North and the South differ only in the manner of harvesting the environmental resource, although both countries are identical in all the other aspects. The North has well-defined property rights on the resource pool. Each harvester owns a part of the resource pool. In the South, the resource pool is what is called the commons. A group of the harvesters sets a rule of the extraction of the environmental resource, and engage in the activity of harvesting. The harvested environmental resource is traded domestically in a competitive market, and is not traded internationally. Let the price of the environmental resource be p E. We also assume the competitive labor market, and denote the wage rate as w. In the North, the resource pool is under the private property rights. Given the stock of the environmental resource, harvesters try to maximize their profits with respect to their labor input. The maximization of the profits leads to f (l E )=ω, (4) 3 Brander and Taylor (1997a, 1997b, 1998) employ this specification of the natural growth function of the resource. 4 Brander and Taylor (1997a, 1997b, 1998) assume that the production function is homogeneous of degree one in labor. It implies that there is no congestion in the use of the resource pool. On the other hand, we assume congestion in harvesting. 3

5 where f (l E )=df (l E )/dl E and ω = w/p E. Eq. (4) determines the ratio of the labor input to the stock of the environment resource. Thus, the ratio in the North, le N, can be expressed as a function of ω. le N = ln E (ω) (5) Notice that le N (ω) isdecreasinginω. In the South, the environmental resource pool is treated as an unregulated common property, which is called the commons. It is open to a member of harvesters.. Non-member is ruled out to have an access to the resource. The members are privileged to harvest the resource, but they do not have a private property rights on the stock of the resource. There are n symmetric harvesters in the South. 5 We assume that n>1. Each harvester receives a fraction of the total output of the environmental resource.. The fraction is the ratio of the harvester s labor input to the total labor input to the environmental resource.. That is, the i-th harvester receives E i = l i F (L E,R)/L E, where l i is the labor of the i-th harvester. We assume that, given the other harvesters labor inputs, the i-th harvester chooses labor input to maximize profits. Then, we have F (L E,R)/L E +(l i /L E ){F L (L E,R) F (L E,R)/L E } = ω. i =1, 2,...,n. Summing these equations yields (1 1/n)f(l E )/l E +(1/n)f (l E )=ω, (6) Thus, the ratio of the labor input to the stock of the environmental resource in the South, l S E, depends on ω. Thatis, le S = ls E (ω) (7) We can easily prove that le S (ω) is a decreasing function of ω. In both countries, the ratio of labor for harvesting to the stock of the environmental resource is determined by the ratio of the wage rate to the price of the environmental resource. 5 We follow the Chichilniski (1993, 1994) s specification of the behaviour of harvesters in the South. 4

6 2.3. The final goods Two final goods are produced from labor and the environment resource. Both countries is assumed to have the same production technologies for them. In the following analysis, the first good is assumed to be environmentally intensive and the second good is labor-intensive. It means that the ratio of the environmental resource to labor input in the first good is larger than that in the second good. The final goods can be traded internationally. The markets of the final goods are perfectly competitive. Let us define the unit cost function of the i-th good as C i (w, p E ). Then, the profit conditions for the final goods are C 1 (w, p E )=p 1, C 2 (w, p E )=p 2, (8) (9) where p i is the price of the i-th final good. Labor is fully employed. The full-employment condition is given by C 1 w(w, p E )Q 1 + C 2 w(w, p E )Q 2 = L L E, (10) where Cw(w, i p E )= C i (w, p E )/ w, Q i is the output of the i-th final good, and L is the exogenous supply of labor which is identical in both countries. The market clearing condition of the environmental resources is Cp(w, 1 p E )Q 1 + Cp(w, 2 p E )Q 2 = E (11) where Cp(w, i p E )= C i (w, p E )/ p E. The equations from (8) to (11) reveal that the subsystem of this model is identical to a standard Heckscher-Ohlin model if the output and labor input of the environmental resource are exogenously given. If both final goods are actually produced, the relative price of the final goods determines ω from eqs. (8) and (9). We know that ω determines l E, and therefore the steady state R in each country. Then, given the relative price of the final goods and the supply of labor, from eqs. (10) and (11) we can solve the steady sate output of the final goods. 3. The steady state and the extraction of the evironmental resource Now, let us consider the steady state of this economy and then investigate the relation between p and L E or E. At the steady state, from (1) or (1 ), we must have dr/dt =0, or R{β(1 R/K) f(l E )} =0. Givenl E, there are two steady states. One is R = 0 and the other is 5

7 R =(K/β){β f(l E )}. (12) We assume that β >f(l E ), and focus on the steady state with a positive stock of the environmental resource. 6 Eq. (12) shows that the stock of the environmental resource is smaller as l E increases. The extraction of the environmental resource at the steady state is given by E = Rf(l E )=(K/β){β f(l E )}f(l E ). (13) Since we have de/dl E =(K/β)f (l E ){β 2f(l E )}, we obtain de/dl E 0 if and only if β/2 f(l E ). (14) The labor input for production of the environmental resource is expressed as L E = Rl E =(K/β){β f(l E )}l E (15) If we define h(l E ) = f(l E )+l E f (l E ), the change in the labor input is given by dl E /dl E = (K/β){β h(l E )}. We assume that h(0) = 0 and h (l E )=dh(l E )/dl E > 0. Then, we observe dl E /dl E 0 if and only if β h(l E ). (16) If we assume that le E and ll E maximize the output of the environmental resource and the input of labor used for it, respectively. That is, de/dl E =0atlE E, or β/2 =f(le E ), and dl E/dl E =0at le L,orβ = h(ll E ). From the definition of le E and ll E,wehave (dl E /dl E ) le =l E E =(K/β){β f(le E ) le E f (l E E )} =(K/β){β/2 le Ef (le E)} > (K/β){β/2 f(le E )} =0. This implies that l E E <ll E. Moreover, l j E,j= N,S depends on the relative price. As long as both final goods are produced, the ratio of the wage rate to the price of the environmental resource is determined as a function of the relative price of the final goods by eqs. (8) and (9). We write the relation as ω(p). Then we have l j E = lj E (ω(p)) for j = N,S. Letpjh satisfy l h E = lj E (ω(pjh )) for j = N,S and h = E,L. Since the first good is environmental resource intensive, dl j E /dp =(dlj E /dω)(dω/dp) > 0forj = N,S.7 Since l E E <ll E,wemusthavepjE <p jl for j = N,S. 6 Under this condition, the steady state yielding the null stock of the resource is unstable. 7 Sinceweassumethatthefirst good is environmentally intensive, the Stolper-Samuelson theorem implies that the ratio of wage rate to the price of the environmental resource decreases as the relative price of the first good increases. 6

8 We can also show that p Sh <p Nh for h = E,L. Chichilniski (1994) proved that l S E (ω) >ln E (ω) for any ω. 8 In order to achieve le E, ω in the South must be higher than in the North. Therefore, p SE must be smaller than p NE. By the same reasoning, we obtain p SL <p NL. Thus,wehavetwocases. Oneisp SE <p NE <p SL <p NL, the other is p SE <p SL <p NE < p NL.Ineithercase,p SE is the lowest, and p NL is the highest. We have the following lemma from (12), (14) and (16). Lemma. We have either p SE <p NE <p SL <p NL or p SE <p SL <p NE <p NL. In country j, j = S and N, we obtain the following relations. (i) For p<p je, ariseinp increases both E and L E. (ii) For p je <p<p jl,ariseinp increases L E, but reduces E. (iii) For p>p je,ariseinp reduces both E and L E. (iv) A rise in p always reduces R. 4. The structure of comparative advantages An autarkic equilibrium plays an important role in examining the comparative advantages and gains from trade. In this section, we will investigate the autarkic equilibrium in the North and the South, and predict the trade patterns between the North and the South. In order to focus the difference in the property right system on the environmental resource, we assume that both countries have an identical homothetic preferences. We denote the relative demand function for the first final good in both countries as d(p), where p = p 1 /p 2.d(p) isdecreasinginp. Curves RD i,i =1, 2, 3, in Figures 1 and 2 illustrate the relative demand curves. RD 1 corresponds to the lower relative demand curve for the environmentally intensive good, and RD 3 shows the higher relative demand for it. RD 2 illustrates the medium relative demand for the environmentally intensive good. Now we investigate the relative supply of the final goods at steady states. We will first examine the difference in the relative supply curves between the North and the South. If we fix therelative price of the final goods, the coefficients of labor and the environmental resource becomes constant. For the same value of ω or p, we know that le S is larger than ln E. For p<pse,fromlemma,an increase in l E makes L E and E larger. Then, from (10) and (11), Q 1 increases and Q 2 decreases as l E increases. It implies that the relative supply of the first good in the South is larger than in the North for that range of the relative price. On the other hand, if p is larger than p NL,anincrease in l E makes L E and E smaller, and reduces q Q 1 /Q 2. Then, the relative supply of the first good 8 This inequality holds if the number of harvesters in the South is larger than one. 7

9 in the South is smaller than in the North. In Figures 1 and 2, RS S is the relative supply curve of the South and RS N is that of the North. At p SE, RS S is to the right of RS N, but at p NE,RS S is to the left of RS N. Next, let us investigate the slope of the relative supply curve in both countries. Totally differentiating (8) and (9), we obtain ˆω = θ 1ˆp, (17) where ˆ indicates the relative change of the variable, and θ = wcw/p 1 1 wcw/p 2 2 < 0. θ is negative since the first good is environmentally intensive. In addition, from eqs. (10) and (11), we know that the relative supply of the first good, q, depends on the value of ω,l E, and E. Totally differentiating (10) and (11), we have ˆq = λ 1 (σˆω δ ˆL E Ê), (18) where λ =(CwQ 1 1 CwQ 2 2 )/(L L E ) < 0, δ = L E /(L L E ) > 0, and σ 0 represents the elasticity of substitution between labor and the environmental resources with respect to ω in production of the final goods. 9 λ is negative, since the first good is environmental resource intensive. σ becomes zero if there is no substitution between labor and the environmental resource in production of the final goods. Substituting (17) to (18), we obtain ˆq = λ 1 θ 1 σˆp λ 1 (δ ˆL E + Ê). (19) The first term in the right hand side of (19) represents a traditional effect of the relative price on the relative output of the final goods. If the factor intensities are different between both sectors, we have λ 1 θ 1 > 0. Then, it shows that a rise in the relative price of the first good increases the relative supply of the first good as long as the elasticity of substitution in either sector is positive. The second term represents the effects of a change in the production of the environmental resource on the relative supply of the final goods. It is a kind of the Rybczynski effects. Since we assume that the first good is environmentally intensive, an increase in the supply of the environmental resource will raise the relative supply of the first good. On the other hand, an increase in the employment of labor for the extraction of the environmental resource reduces the possible labor force for the production of the final good. Then, it will increase the relative supply of the environmentally intensive good. 9 See Jones (1965) for this derivation. 8

10 In general, the slope of the relative supply curve is determined by the traditional effect shown by the first term of (14) and by the new effect shown in the second term of (14). 10 If the elasticity of substitution in the final goods is so large that the first term of (14) dominates the second term of (14), the relative supply curve has an upward slope. Figure 1 illustrates the relative supply curves in this case. We assume that the relative supply curves intersect at p X. 11 On the other hand, suppose that there is no factor substitution between labor and the environmental resource in the production of the final goods, and therefore σ = 0. In this case, the first term of the right hand side of (19) disappears, and the second term matters only. From Lemma, in country j, ariseinp increases q for p<p je, but it decreases q for p>p jl. It implies that the relative supply curves are backward bending. Moreover, we can show that, with higher relative price of the first good, the North can achieve the same relative supply of the first good in the South. From (10), (11), (13), and (15), q is determined if l E is given. Let us consider the relative price in each country which yield the same l E. We have already noted that ω in the North must be lower than in the South in order to obtain the same l E. It implies that the relative price of the first good, p, must be higher in the North in order to obtain the same l E as in the South. Thus, p in the North must be higher than in the South for the same q. RS S and RS N in Figure 2 represent the relative supply curves of the South and the North, respectively, in this case. The relative supply curves intersect at p X. Now let us examine the structure of comparative advantages between the South and the North. As is shown in Figures 1 and 2, if the relative demand for the environmental resource good is smaller than its relative supply at p X, the autarkic equilibrium relative price of the environmental resource good is lower in the South than in the North. Then, the South has a comparative advantage in the environmentally intensive good. After opening of international trade, the relative price goes up in the South, and it decreases in the North. Next, consider the case where the relative demand is larger than the relative supply at p X.In the case shown by Figure 1, we can obviously show that the North has a comparative advantage in the environmentally intensive good. In the case of backward bending relative supply curves, the result may be not so clear. Let us assume the Walrasian stability of the autarkic equilibrium.. Then, the slope of the relative supply curves must be larger than that of the relative demand 10 We assume here that both countries do not completely specialize. If the the extraction of the environmetal resource is so small, the country may specialize in the labor intensive good. With mediam level of the extraction, the country may specialize completely in the environmentally intensive good. 11 We assume that there is one intersection of the relative supply curves of the South and the North. 9

11 curve at the autarkic equilibrium in each country, as is shown in Figure 2. Then, the North has a comparative advantage in the environmentally intensive good. Summing up, we have the following proposition. Proposition 1. If the relative demand for the environmentally intensive good is so low that it is smaller than the relative supply at p X, then the South has a comparative advantage in the environmentally intensive good. If the relative demand for the environmentally intensive good is so large that it is larger than the relative supply at p X and we assume the Walrasian stability of the autrakic equilibrium in both countries, then the North has a comparative advantage in the environmentally intensive good. It will be worth explaining the difference in the trade pattern in the long-run and the short-run. In the short-run, the stock of the environmental resource is fixed. Equations (10) and (11) can be expressed as C 1 w(w, p E )Q 1 + C 2 w(w, p E )Q 2 = L l E R, (10 ) C 1 p(w, p E )Q 1 + C 2 p(w, p E )Q 2 = f(l E )R. (11 ) For the same price of the final good, both countries face the same w and p E from (8) and (9). Since le S (ω) >ln E (ω), from (10 ) and (11 ), the relative supply of the environmentally intensive good is larger in the South than in the North as long as the South owns the same stock of the environmental resource as in the North. Therefore, in the short-run, the South has a comparative advantage in the environmental resource intensive good as long as the stock of the environmental resource is the same in both countries. 12 In the long-run, however, the South may loose a comparative advantage in the environmentally intensive good as is shown in Proposition 1. In particular, the higher demand for the environmentally intensive good increases the extraction of the environmental resource, and reduces the stock of the environmental resource at the steady state. Then, with the smaller stock it, the harvesters in the South can extract the smaller amount of the environmental resource. Proposition 1 complements the result of Chichilniski(1993), which deals only with the case where the relative demand for the environmentally intensive good is small. She pointed out that the South has a comparative advantage in the environmentally intensive good even in the long-run, but it is not true with the stronger demand for the environmentally intensive good. On the other 12 The South has a shortrun comparative advantage in the envrionmental resource intensive good even if the stock of the environmental resource is larger in the South than in the North. 10

12 hand, our results turn out to be similar to those derived in Brander and Taylor (1997), which construct a different model from ours. They prove that a country with overextraction of resources has a comparative advantage in the harvest good in the case of the mild overuse, and vice versa in the severe overuse. 5. Gains from trade We examine the gains from trade in this section. First of all, let us present the equation which yields the welfare level of each country. We define the expenditure function of country j as e(p 1,p 2,u j ), where u j represents welfare in country j. On the other hand, equations (8), (9), (10), (11) show that the GDP is determined in the same manner as in the standard Heckscher- Ohlin model, given L E and E. Let us denote the GDP function as g(p 1,p 2,L L E,E). We know that g pi g(p 1,p 2,L L E,E)/ p i = Q i,g L g(p 1,p 2,L L E,E)/ (L L E )=w, and g E g(p 1,p 2,L L E,E)/ E = p E. From the budget constraint of the consumers, the total expenditure must be equal the GDP of the country. Then, we have e(p 1,p 2,u j )=g(p 1,p 2,L L E,E), j= S and N. (20) Totally differentiating (20) and the production function of the environmental resource, we obtain e u du j = p 2 (Q 1 D 1 )dp + p E (f ω)dl E + p E F R dr, (21) where e u e(p 1,p 2,u j )/ u j > 0andF R F (L E,E)/ R >0. The firsttermoftherighthandsideof(21)representsthewelfareeffect of terms of trade. As is well known, the improvement of terms of trade will increase welfare in the country. In our model, opening of trade increases the relative price of an exported good. Thus, this effect basically increases welfare of each country. At the neighborhood of the autarky, however, the domestic production is approximately equal to the domestic demand. It implies that the firsttermdisappearsjustafter trade is opened. The second and third terms of (21) do not appear in the standard Heckscher-Ohlin model. The second term show the welfare change due to a change in the short-run distortion. If labor is efficiently allocated, we must have f = ω, and the second term disappears. If the extraction of the environmental resource good overuses labor, we must have f < ω. Then,anincreaseinthe labor input for the extraction reduces welfare. Third term of (21) shows the long-run effect of the extraction of the environmental resource. An increase in the stock of the environmental resource enhances welfare in the country, and vice versa. 11

13 In the North, as is shown in (4), labor is efficiently allocated. Thus, the second term of (21) disappears. Since a decrease in p always raises the stock of the environmental resource, the North gains from trade if the relative price of the environmental resource intensive good decreases after opening of trade. Therefore, if the North has a comparative disadvantage in the environmental resource good, trade increases welfare in country. On the other hand, in the South, labor is overused for the extraction of the environmental resource. Since we have (1 1/n)f(l E )+(1/n)f (l E ) >f (l E ) for any l E,weobtainf (l E ) < ω from (6). 13 Thus, in order to make the second term of (21) positive, opening of trade must reduce the labor input for the extraction of the environmental resource. In addition, the South must have a comparative disadvantage in the environmental resource intensive good to increase the stock of the environmental resource, which makes the third term of (21) positive. Let us consider the condition to make the second and third terms positive in the South. Suppose that the relative demand for the environmental resource intensive good is so large that the South has a comparative disadvantage in it, but is not so large that the autarkic relative price of it is lower than p SL. This situation is possible if we assume that p X <p SL. This case is illustrated by relative demand curve RD 2 in Figures 1 and 2. Then, opening of trade reduces the relative price of the environmental resource good in the South. By Lemma, trade decreases the labor input for the extraction of the environmental resource. Thus, in this situation, three terms of (21) becomes positive and the South gains from trade. If the relative demand for the environmental resource intensive good is so strong that the autarkic relative price of it is higher than p SL, the second term of (21) becomes negative and the South may not gain from trade. Summarizing the discussion, we obtain the following proposition. Proposition 2. (i) The North gains from trade if the North has a comparative disadvantage in the environmentally intensive good. (ii) Suppose that p X <p SL. The South gains from trade if the South has a comparative disadvantage in the environmentally intensive good, and the autarkic relative price is lower than p SL. In the short-run, the North always gains from trade. Since the stock of the environmental resource is fixed in the short-run, only the first term of (21) appears in the North. In the South, trade always increases the labor input for the environmental resource, and makes the second term negative. Therefore, the South has always has a possibility of loosing from trade. Proposition 2 13 This result is proved by Chichilniski(1994). 12

14 shows that these results in the short-run are not always true in the long-run. Although we obtain the similar results on trade patterns as in Brander and Taylor (1997), Proposition 2 reveals a difference between them. Brander and Taylor (1997) shows that both countries gain from trade for the case of a strong demand for the resource good. In our model, consider the case of a very strong demand for the environmentally intensive good like RD 3 in Figures 1 and 2. Since the North has a comparative advantage in the environmentally intensive good, the stock of the environmental resource decreases after opening of trade. Thus, the North may loose from trade since the third term of (21) is negative. In the South, the relative price of the environmentally intensive good decreases after trade, but in this range of the relative price a decrease in it increases the labor input for the extraction of the environmental resource. Thus, the second term of (21) becomes negative, and the South may loose from trade. Thus, in our model, both countries may loose from trade if the relative demand for the environmentally intensive good is so strong. 6. Concluding remarks We have examined the law of comparative advantages and gains from trade in the presence of adifference in the system of property rights between the South and the North. We have shown that the South may loose the comparative advantage in the environmentally intensive good in the long-run though the South always has a comparative advantage in it. It occurs if consumers have a strong demand for the environmentally intensive good. In addition, we have pointed out that the long-run trade gains differ from the short-run. We have not analyzed the optimal or the second best polices in this economy. We should notice that, with a higher demand for the environmentally intensive good, the stock and the extraction of the environmental resource becomes smaller, and the production levels of the final goods decreases. Then, at the steady state, each country may attain a low level of welfare. In this case, some policies that reduces relative demand for the environmentally intensive good may increase the welfare level of both countries. So analyzing some environmental or trade policies will yield richer results on trade and environment. 13

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16 resources. Quarterly Journal of Economics 89, Markusen, J.R., Production and trade from international common property resources. Canadian Journal of Economics 89,

17 p NL p SL RS S RS N RD 3 p X RD 2 p SE RD 1 Figure 1

18 RS S RS N p NL p SL RD 3 p X RD 2 p SE RD 1 Figure 2