Environmental leakage

A country is a net exporter of a good whose production generates pollution (e.g., negative externality in production).

a) Draw a graph that illustrates production under both autarky and trade assuming no environmental regulations are in place. Identify:

1. NSG from trade
2. NSG from pollution
3. Aggregate NSG
4. b)Based on results in part (a), can trade be welfare-reducing if there are no environmental regulations? What would need to be true for trade to be welfare reducing?
5. c)Is it possible for trade in this good to be welfare-reducing if there is an environmental regulation that fully accounts for the welfare costs of pollution? Provide a explanation of why or why not.
6. Now consider a different good where the country is a net importer and there is a negative externality in the consumption of that good (e.g., smoking). See example below.

d) Draw a graph that illustrates production under both autarky and trade assuming no regulations are in place to address the externality. Identify:

1. NSG from trade
2. NSG from pollution
3. Aggregate NSG