International trade in waste products in the presence of illegal disposal

Abstract This paper develops a simple model of international trade in waste disposal services and investigates the welfare effects of restricting such trade. While the first-best policy is to allow free trade in all goods and services and to use internal taxes and regulation to control the externalities associated with waste disposal, such a policy increases the incentives for firms to evade taxes and regulations and dispose of their wastes illegally. In this case, the optimal tax can be lower than it would be in the absence of illegal activity, and trade restrictions on waste disposal can be welfare improving.

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