R&d in Cleaner Technology and International Trade

We consider a symmetric three-stage game played by two regulator-firm hierarchies to capture the scale and technology effects. Each firm produces one good sold on the market. Firms can invest in R&D in order to lower their fixed emission/output ratio and are regulated with costly public funds. Opening markets to international trade leads to both more investment in R&D and production. When the sensitivity of consumers to the environment and the investment cost parameter are sufficiently high, pollution under common market is higher than under autarky. The social welfare when markets are separated is higher than when there is international trade.