Regional pollution and multinational firms

This paper investigates the incidence of pollution control in a two-country, two good model of trade and investment when capital is internationally mobile. In this context, we show the trade-off between the regulation of pollution and national income in the host country and the interrelationship between policies pursued in the host country and the economy of the source country. One noteworthy result is that more restrictive pollution controls in the host country may cause a decline in the real income of the source country, the home of multinational firms.