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Pollution and land use: Optimum and decentralization

  • Arnott, Richard
  • Hochman, Oded
  • Rausser, Gordon C.

Space matters not only by inducing transport costs but also by mitigating pollution damages. Previous models of pollution either disregard space altogether or presume a predetermined separation between polluters and pollutees. In our model, workers commute to factories and all possible location combinations of housing and industry around a circle are considered. We investigate optimal allocations and their decentralization. The tradeoff between pollution costs and transport costs, along with the non-convexity inherent in spatial models, results in multiple local optima. With negligible commuting costs, the optimal allocation has one industrial and one residential zone. As commuting costs increase, the number of zones of each type increases until an allocation is reached in which housing and industry are completely intermixed. The global optimal allocation is decentralized by imposing a tax per unit area of industrial land at a particular location equal to the total damage caused by the pollution from that unit area, evaluated at the global optimum. Location-specific Pigouvian taxes by themselves are inefficient.

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Article provided by Elsevier in its journal Journal of Urban Economics.

Volume (Year): 64 (2008)
Issue (Month): 2 (September)
Pages: 390-407

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Handle: RePEc:eee:juecon:v:64:y:2008:i:2:p:390-407
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622905

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  1. McCluskey, Jill J. & Rausser, Gordon C., 2003. "Hazardous waste sites and housing appreciation rates," Journal of Environmental Economics and Management, Elsevier, vol. 45(2), pages 166-176, March.
  2. Hochman, Oded, 1981. "Land rents, optimal taxation and local fiscal independence in an economy with local public goods," Journal of Public Economics, Elsevier, vol. 15(1), pages 59-85, February.
  3. Robert E. Lucas, Jr., 2001. "Externalities and Cities," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(2), pages 245-274, April.
  4. Costanza, Robert, 1995. "Economic growth, carrying capacity, and the environment," Ecological Economics, Elsevier, vol. 15(2), pages 89-90, November.
  5. Tietenberg, T. H., 1974. "Derived decision rules for pollution control in a general equilibrium space economy," Journal of Environmental Economics and Management, Elsevier, vol. 1(1), pages 3-16, May.
  6. Rausser, Gordon C. & Lapan, Harvey E., 1980. "Natural resources, goods, bads and alternative institutional frameworks," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt8kk527gt, Department of Agricultural & Resource Economics, UC Berkeley.
  7. Henderson, J Vernon, 1996. "Effects of Air Quality Regulation," American Economic Review, American Economic Association, vol. 86(4), pages 789-813, September.
  8. Robert E. Lucas & Esteban Rossi-Hansberg, 2002. "On the Internal Structure of Cities," Econometrica, Econometric Society, vol. 70(4), pages 1445-1476, July.
  9. Polinsky, A Mitchell, 1980. "Strict Liability vs. Negligence in a Market Setting," American Economic Review, American Economic Association, vol. 70(2), pages 363-67, May.
  10. Arrow, Kenneth & Bolin, Bert & Costanza, Robert & Dasgupta, Partha & Folke, Carl & Holling, C.S. & Jansson, Bengt-Owe & Levin, Simon & Mäler, Karl-Göran & Perrings, Charles & Pimentel, David, 1996. "Economic growth, carrying capacity, and the environment," Environment and Development Economics, Cambridge University Press, vol. 1(01), pages 104-110, February.
  11. Arnott, Richard, 1979. "Optimal city size in a spatial economy," Journal of Urban Economics, Elsevier, vol. 6(1), pages 65-89, January.
  12. T. H. Tietenberg, 1978. "Spatially Differentiated Air Pollutant Emission Charges: An Economic and Legal Analysis," Land Economics, University of Wisconsin Press, vol. 54(3), pages 265-277.
  13. Esteban Rossi-Hansberg, 2004. "Optimal Urban Land Use and Zoning," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(1), pages 69-106, January.
  14. Jill J. McCluskey & Gordon C. Rausser, 2003. "Stigmatized Asset Value: Is It Temporary or Long-Term?," The Review of Economics and Statistics, MIT Press, vol. 85(2), pages 276-285, May.
  15. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680, March.
  16. Spulber, Daniel F., 1985. "Effluent regulation and long-run optimality," Journal of Environmental Economics and Management, Elsevier, vol. 12(2), pages 103-116, June.
  17. repec:cup:cbooks:9780521311120 is not listed on IDEAS
  18. Hochman, Oded & Ofek, Haim, 1979. "A theory of the behavior of municipal governments: The case of internalizing pollution externalities," Journal of Urban Economics, Elsevier, vol. 6(4), pages 416-431, October.
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  20. A. Mitchell Polinsky, 1980. "Strict Liability versus Negligence in a Market Setting," NBER Working Papers 0420, National Bureau of Economic Research, Inc.
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