We proxy our technique effect by a moving average of lagged income, I. Because we believe the transmission of income gains into policy is both slow and reflects long run averages, we use as our proxy for income a (one period lagged) three year moving average of GDP per capita. We have also allowed the technique effect to have a diminishing impact at the margin by entering both the level and the square of income per capita in all of our regressions.
Population size, N, appears in (2.22) because the Samuelson rule sums marginal damage over all individuals exposed to a unit of pollution. Air pollution standards are in most countries uniform throughout the country with the actual level of the standard either set by, or heavily influenced by, national governments. Since policy is nation wide, our theory would indicate that the relevant regressor arising from the Samuelson rule would be some average number of exposed individuals taken from a mix of metropolitan and nonmetropolitan areas in the country. Exposure would also have to reflect country specific disbursement potential and weather patterns. Since we have very little confidence in our ability to construct a suitable proxy, we treat this factor as an unobservable component in our error term.
Changes in tastes or knowledge concerning pollution, plus changes in world prices are treated as common-to-world trends and are discussed subsequently in the section on common-to-world determinants.
Finally our theory ties trade frictions b to pollution concentrations, but the sign of this composition effect depends on a country’s comparative advantage. Comparative advantage is in turn a function of a country’s income per capita and its capital abundance. To capture this feature in our empirical work we proceed as follows. First, we need a measure to reflect the extent to which international trade affects the domestic economy. We adopt for this purpose a country’s trade intensity ratio: the ratio of exports plus imports to GDP. This proxy accords well with our theory because a movement of b towards 1 raises the ratio of exports plus imports to GDP for any country.