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Taxing pollution: agglomeration and welfare consequences

Marcus Berliant (), Shin-Kun Peng and Ping Wang ()

Economic Theory, 2014, vol. 55, issue 3, 665-704

Abstract: This paper demonstrates that a pollution tax with a fixed cost component capturing an “ambient tax” may lead, by itself, to stratification between clean and dirty firms without heterogeneous preferences or increasing returns. We construct a simple model with two locations and two industries (clean and dirty) where pollution is a by-product of dirty good manufacturing. Under proper assumptions, a completely stratified configuration with all dirty firms clustering in one city emerges as the only equilibrium outcome when there is a fixed cost component of the pollution tax. Whereas the fixed component of the pollution tax and decreasing private returns are needed for agglomeration of dirty firms, the Romer-type positive spillovers are not necessary. Moreover, a stratified Pareto optimum can never be supported by a competitive spatial equilibrium with a linear pollution tax that encompasses Pigouvian taxation as a special case. To support such a stratified Pareto optimum, however, an effective but unconventional policy prescription is to redistribute the pollution tax revenue from the dirty to the clean city residents. Copyright Springer-Verlag Berlin Heidelberg 2014

Keywords: Pollution tax; Agglomeration of polluting producers; Endogenous stratification; Pareto optimality of stratified equilibrium; D62; H23; R13 (search for similar items in EconPapers)
Date: 2014
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Related works:
Working Paper: Taxing Pollution: Agglomeration and Welfare Consequences (2013) Downloads
Working Paper: Taxing pollution: agglomeration and welfare consequences (2012) Downloads
Working Paper: Taxing Pollutuion: Agglomeration and Welfare Consequences (2012) Downloads
Working Paper: Taxing pollution: agglomeration and welfare consequences (2011) Downloads
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