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Taxing pollution: agglomeration and welfare consequences

  • Berliant, Marcus
  • Peng, Shin-Kun
  • Wang, Ping

This 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 prescription is to redistribute the pollution tax revenue from the dirty to the clean city residents.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 34982.

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Date of creation: 23 Nov 2011
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Handle: RePEc:pra:mprapa:34982
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