Location: 368A Heady Hall

Description: JunJie Wu  (Oregon State University)

"Agglomeration Economies and Efficient Environmental Regulation"

Abstract: Agglomeration economies have long been a focal point of regional and urban economics; however, little research has explored their implications for environmental policy design. This paper first develops a model to analyze firms’ location decisions in an economy with agglomeration economies and then uses it to examine the interaction effect between agglomeration economies and environmental regulation. Results suggest that consideration of agglomeration economies and firm relocations can change some of the classic results from traditional Pigouvian marginal analysis. Perhaps the most striking result is that a performance or technology standard commonly used for pollution control can lead to a higher aggregate ambient pollution level, an increased pollution concentration, and a larger amount of total pollution damage when firms can relocate in response to environmental regulation and agglomeration economies. Adoption of cleaner technology makes it less costly for firms to agglomerate, which leads to increased concentration of firms and higher pollution exposures. Agglomeration economies enhance the effect of a regulatory standard when production cost is sufficiently sensitive to it, making it more likely to be counterproductive. An emission tax can also lead to greater concentration of pollution and more pollution damage, even if the aggregate ambient pollution level may be lower under the tax.

Contact Person: Wendong Zhang