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Location decisions of industries in the presence of transportation costs and environmental regulations: empirical evidence from India

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  • Gaurav Bhattacharya

    (Jawaharlal Nehru University)

Abstract

This paper examines how transport costs and pollution taxes both jointly determine the location of production in a spatial framework. In a two-region model, a firm produces a dirty good through a single production plant in one region and serves consumers in both regions. Production, which causes local pollution, is subject to some pollution tax. Furthermore, the firm has to incur transport costs in order to serve consumers in the other region. Using factory level data for the Indian manufacturing sector for the year 2011–2012, I find evidence that both these factors play a significant role in firm location decision. States with relatively stringent environmental regulations are less attractive for plant location. On the contrary, the impact of transport infrastructure is dependent on the level of soft means of communication. Effective means of communication networks reduce the need for transport infrastructure. Apparently, communication networks act as a substitute for effective transport infrastructure. However, this does not hold true for the sub-sample of highly polluting industries.

Suggested Citation

  • Gaurav Bhattacharya, 2019. "Location decisions of industries in the presence of transportation costs and environmental regulations: empirical evidence from India," Journal of Social and Economic Development, Springer;Institute for Social and Economic Change, vol. 21(1), pages 24-53, June.
  • Handle: RePEc:spr:jsecdv:v:21:y:2019:i:1:d:10.1007_s40847-019-00074-0
    DOI: 10.1007/s40847-019-00074-0
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    More about this item

    Keywords

    Firm location; Environmental regulations; Transport cost; Consumers’ surplus;
    All these keywords.

    JEL classification:

    • L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General
    • R11 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Regional Economic Activity: Growth, Development, Environmental Issues, and Changes
    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)
    • R30 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location - - - General

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