Environmental Policy, Spatial Spillovers and the Emergence of Economic Agglomerations
We explain the spatial concentration of economic activity, in a model of economic geography, when the cost of environmental policy - which is increasing in the concentration of pollution - and an immobile production factor act as centrifugal forces, while positive knowledge spillovers and iceberg transportation costs act as centripetal forces. We study the agglomeration e ects caused by trade-o s between centripetal and centrifugal forces. The above e ects govern rmsÃƒÂ¢Ã¯Â¿Â½Ã¯Â¿Â½ location decisions and, as a result, they de ne the distribution of economic activity across space. We derive the rational expectations equilibrium, which results either in a monocentric or in a polycentric city, and the regulatorÃƒÂ¢Ã¯Â¿Â½Ã¯Â¿Â½s optimum, which results in a bicentric city. We compare the outcomes and characterize the optimal spatial policies.
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