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Taxing Pollutuion: Agglomeration and Welfare Consequences

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

ERSA conference papers from European Regional Science Association

Abstract: This paper demonstrates that a pollution tax with a fixed cost component may lead, by itself, to segregation 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. To support such a stratified Pareto optimum, however, an effective but unconventional policy pre-scription is to redistribute the pollution tax revenue from the dirty to the clean city residents. JEL Classification: D62, H23, R13. Keywords: Pollution Tax, Agglomeration of Polluting Producers, Endogenous Stratification.

New Economics Papers: this item is included in nep-env
Date: 2012-10
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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 pollution: agglomeration and welfare consequences (2012) Downloads
Working Paper: Taxing pollution: agglomeration and welfare consequences (2011) Downloads
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