Environment, trade, and strategic interdependence: A simple model with implications for NAFTA

Trade under oligopolistic industry structure is analyzed when the industries pollute the environment and when tax is used to regulate pollution. When trade occurs among neighboring countries, as is the case with NAFTA, the effectiveness of regulation depends on whether pollutants are global (i.e. cross borders) or are locally confined to each country. Not only do industries act strategically, but so do the regulators in each country act strategically vis-a-vis one another. A number of important and interesting results are derived.