International Trade - Theory and Policy, 2010a

public debate, arguing that trade is either good for the environment, or bad for the environment. The real
world linkages are a little bit of both.” [3]
Some of the main findings of the report are listed here with a brief explanation of how these statements
relate to the theory of the second best.
Most environmental problems result from polluting production processes, certain kinds of
consumption, and the disposal of waste products—trade as such is rarely the root cause of
environmental degradation, except for the pollution associated with transportation of goods. [4]
This statement relates to the theory of the second best by highlighting that the root cause of most
environmental problems is the production, consumption, and disposal processes rather than trade. The
one exception is pollution caused by ships, trucks, trains, and planes transporting goods across borders,
but this is a relatively minor source of global pollution. Recall that first-best solutions are those that attack
the root cause of a problem most directly.
Environmental degradation occurs because producers and consumers are not always required
to pay for the costs of their actions. [5]
This statement means that environmental problems are a negative externality in either production or
consumption. If producers and consumers had to pay for the environmental effects of their actions, that
would mean there is a market for pollution. In a market, the costs and benefits are internalized in the
decision-making process. However, in the absence of a market, producer and consumer effects occur
“external” to the market, hence the term “externality.”
However, this statement exaggerates one thing if it suggests that environmental degradation would not
occur if consumers and producers were required to pay for their actions. In actuality, if a market for
pollution existed, producers and consumers would continue to pollute up to the level where the costs of
additional pollution exceeded the benefits. This undoubtedly would occur at some positive level of
pollution and environmental degradation. As demonstrated in every environmental economics course, the
socially optimal level of pollution is not zero.
Environmental degradation is sometimes accentuated by policy failures, including subsidies to
polluting and resource-degrading activities—such as subsidies to agriculture, fishing and
energy. [6]
Saylor URL: http://www.saylor.org/books
Saylor.org
504