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Research Highlights

Taxing Pollution: Agglomeration and Welfare Consequences (with Marcus Berliant and Ping Wang, published in ECONOMIC THEORY in 2014)

  • Author Marcus Berliant
    Shin-Kun Peng
    Ping Wang
  • Abstract This paper demonstrates that a pollution tax with a fixed cost component capturing an “ambient tax” may lead, by itself, to stratification 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. Whereas the fixed component of the pollution tax and decreasing private returns are needed for agglomeration of dirty firms, the Romer-type positive spillovers are not necessary. Moreover, a stratified Pareto optimum can never be supported by a competitive spatial equilibrium with a linear pollution tax that encompasses Pigouvian taxation as a special case. 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.

  • Link http://link.springer.com/article/10.1007%2Fs00199-013-0768-9(Open New Window)