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Pollution and Land Use: Optimum and Decentralization

  • Oded Hochman

    (Department of Economics, Ben Gurion University of the Negev)

  • Gordon Rausser

    (University of California, Berkeley)

  • Richard Arnott

    ()

    (Department of Economics, University of California Riverside)

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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File URL: http://economics.ucr.edu/papers/papers08/08-05.pdf
File Function: First version, 2008
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Paper provided by University of California at Riverside, Department of Economics in its series Working Papers with number 200805.

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Length: 60 pages
Date of creation: Mar 2008
Date of revision: Mar 2008
Handle: RePEc:ucr:wpaper:200805
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  1. Arrow, Kenneth & Bolin, Bert & Costanza, Robert & Dasgupta, Partha & Folke, Carl & Holling, C. S. & Jansson, Bengt-Owe & Levin, Simon & Maler, Karl-Goran & Perrings, Charles & Pimentel, David, 1995. "Economic growth, carrying capacity, and the environment," Ecological Economics, Elsevier, vol. 15(2), pages 91-95, November.
  2. Costanza, Robert, 1995. "Economic growth, carrying capacity, and the environment," Ecological Economics, Elsevier, vol. 15(2), pages 89-90, November.
  3. 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.
  4. 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.
  5. Arnott, Richard, 1979. "Optimal city size in a spatial economy," Journal of Urban Economics, Elsevier, vol. 6(1), pages 65-89, January.
  6. 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.
  7. Rausser, Gordon C. & Lapan, Harvey E, 1980. "Natural resources, goods, bads and alternative institutional frameworks," CUDARE Working Paper Series 89, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy.
  8. 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.
  9. 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.
  10. 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.
  11. Spulber, Daniel F., 1985. "Effluent regulation and long-run optimality," Journal of Environmental Economics and Management, Elsevier, vol. 12(2), pages 103-116, June.
  12. A. Mitchell Polinsky, 1980. "Strict Liability versus Negligence in a Market Setting," NBER Working Papers 0420, National Bureau of Economic Research, Inc.
  13. Henderson, J Vernon, 1996. "Effects of Air Quality Regulation," American Economic Review, American Economic Association, vol. 86(4), pages 789-813, September.
  14. McCluskey, Jill Jennifer & Rausser, Gordon C, 2000. "Hazardous waste sites and housing appreciation rates," CUDARE Working Paper Series 906, University of California at Berkeley, Department of Agricultural and Resource Economics and Policy.
  15. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680, March.
  16. 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.
  17. repec:cup:cbooks:9780521322249 is not listed on IDEAS
  18. Robert E. Lucas & Esteban Rossi-Hansberg, 2002. "On the Internal Structure of Cities," Econometrica, Econometric Society, vol. 70(4), pages 1445-1476, July.
  19. 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.
  20. repec:cup:cbooks:9780521311120 is not listed on IDEAS
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