On foreign aid, pollution and abatement

This paper provides a Ricardian general equilibrium model to study the effect of foreign aid aimed at abating pollution in a small southern recipient economy. The government faces a dynamic problem as it chooses the emission level and abates pollution. The stock of pollution damages consumers and its law of motion is influenced by emission level and the stock of pollution as well as the level of abatement. We show that such type of aid increases emissions, but its effect on pollution stock is ambiguous in the absence of trade. With trade, aid reduces both pollution and emissions given that the recipient country has comparative advantage in the pollution-intensive good. Moreover, such type of aid can be immiserizing with or without trade.