5 CONCLUSION
The perceived negative impact of environmental policies on domestic industrial competitiveness is often the reason why countries are reluctant to implement stringent environmental regulations. In this paper we have shown that if environmental regulations are accompanied by production subsidies in a particular way, then domestic industries will not be harmed in terms of their relative international competitiveness and at the same time pollution will be reduced and welfare could increase, in all countries.
More specifically, we have examined three different scenarios. We began with the case of free entry and exit of firms, using a fairly general model with general demand and cost functions. We established that in this case a unilateral or multilateral piecemeal policy reform designed to leave the market shares of countries unchanged will unambiguously reduce pollution. Furthermore, a multilateral policy will increase welfare in both countries provided the marginal disutilities from pollution are sufficiently high. A unilateral policy will increase welfare in the country implementing the policy if the marginal disutility from pollution is sufficiently high in that country, and will always increase welfare in the other country.
