Environmental regulation and the optimal location of the risk-averse firm under uncertainty

Murat Isik

Environment and Development Economics, 2005, vol. 10, issue 4, 435-452

Abstract: The interrelationships between environmental regulations and firm location are essential features of economic development. This paper examines the optimal location of a competitive firm in response to environmental costs imposed by the abatement investment and taxes when the cost of the environmental regulation varies spatially under uncertainty. It contributes to the literature by incorporating the spatial setting into a risk-averse firm's location decision in the presence of environmental regulation uncertainty. An augmented cost of the abatement, input tax, or emission tax causes the risk-averse firm to locate closer to the output market. Uncertainty about environmental regulations also leads a risk-averse firm to locate closer to the output market. Policy implications of the results are discussed. The results have implications for the design and implementation of environmental and other development-related policies, environment–development debate, and trade–environment debate.

Date: 2005
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