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Taxing pollution: agglomeration and welfare consequences

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

MPRA Paper from University Library of Munich, Germany

Abstract: This paper demonstrates that a pollution tax with a fixed cost component 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. 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.

Keywords: pollution tax; agglomeration of polluting producers; endogenous stratification (search for similar items in EconPapers)
JEL-codes: D62 R13 H23 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-env, nep-pbe and nep-ure
Date: 2012-07-24
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https://mpra.ub.uni-muenchen.de/40250/1/MPRA_paper_40250.pdf original version (application/pdf)

Related works:
Journal Article: Taxing pollution: agglomeration and welfare consequences (2014) Downloads
Working Paper: Taxing Pollution: Agglomeration and Welfare Consequences (2013) 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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