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Pollution Havens and Industrial Agglomeration

  • Dao-Zhi Zeng

    (Graduate School of Management, Kagawa University, Japan)

  • Laixun Zhao

    (Research Institute for Economics & Business Administration (RIEB), Kobe University, Japan)

Pollution-intensive industries are generally characterized by imperfect competition, increasing returns to scale and large transportation costs. We investigate two countries, N and S, each with two sectors. Manufacturing generates cross-border pollution which reduces agricultural production. Firms can freely move across country borders, but not workers. First, we show that pollution lowers local income since it reduces agricultural production. This income-reduction effect discourages firms to move to the country with laxer environmental regulations that generate more pollution. Second, our analysis demonstrates that manufacturing agglomeration forces can alleviate the pollution haven effect. And a pollution haven may not arise, if environmental regulation is slightly more stringent in the larger country N than in the smaller country S. These results are strongly supported by recent empirical findings. In addition, the model predictions call for international cooperation of environmental policies, especially when trade becomes freer.

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Paper provided by Research Institute for Economics & Business Administration, Kobe University in its series Discussion Paper Series with number 197.

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Length: 31 pages
Date of creation: Nov 2006
Date of revision:
Handle: RePEc:kob:dpaper:197
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