Taxing Pollutuion: Agglomeration and Welfare Consequences
AbstractThis 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.
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- Marcus Berliant & Shin-Kun Peng & Ping Wang, 2014. "Taxing pollution: agglomeration and welfare consequences," Economic Theory, Springer, vol. 55(3), pages 665-704, April.
- Berliant, Marcus & Peng, Shin-Kun & Wang, Ping, 2013. "Taxing Pollution: Agglomeration and Welfare Consequences," MPRA Paper 45520, University Library of Munich, Germany.
- Berliant, Marcus & Peng, Shin-Kun & Wang, Ping, 2011. "Taxing pollution: agglomeration and welfare consequences," MPRA Paper 34982, University Library of Munich, Germany.
- Berliant, Marcus & Peng, Shin-Kun & Wang, Ping, 2012. "Taxing pollution: agglomeration and welfare consequences," MPRA Paper 40250, University Library of Munich, Germany.
- D62 - Microeconomics - - Welfare Economics - - - Externalities
- H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
- R13 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General Equilibrium and Welfare Economic Analysis of Regional Economies
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