Environmental Standards as Strategic Outcomes: A Simple Model

This paper examines the strategic nature of choice of environmental standards under
different degrees of openness of countries. It also compares and contrasts equilibrium
environmental standards and levels of pollution, local and global, with the world
optimum levels. It shows that, in case of open economies, environmental standards can be
strategic substitutes or complements. In equilibrium, countries set higher environmental
standards in case of open economies compared to that in case of closed economies. It
also shows that equilibrium standards in case of open economies are higher than the
world optimum in certain situations. In contrast, countries set lower environmental
standards, in equilibrium, than the world optimum in absence of international trade.