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Taxing Pollutuion: Agglomeration and Welfare Consequences

  • Marcus Berliant
  • Shin-Kun Peng

    ()

  • Ping Wang

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 pre-scription is to redistribute the pollution tax revenue from the dirty to the clean city residents. JEL Classification: D62, H23, R13. Keywords: Pollution Tax, Agglomeration of Polluting Producers, Endogenous Stratification.

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Paper provided by European Regional Science Association in its series ERSA conference papers with number ersa12p94.

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Date of creation: Oct 2012
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Handle: RePEc:wiw:wiwrsa:ersa12p94
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  1. Hassan Benchekroun & Ngo Van Long, 1997. "Efficiency Inducing Taxation for Polluting Oligopolists," CIRANO Working Papers 97s-21, CIRANO.
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  20. Carlton, Dennis W & Loury, Glenn C, 1980. "The Limitations of Pigouvian Taxes as a Long-Run Remedy for Externalities," The Quarterly Journal of Economics, MIT Press, vol. 95(3), pages 559-66, November.
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