Title
Pollution Havens and Industrial Agglomeration
Abstract
Pollution-intensive industries are generally characterized by imperfect competition,
increasing returns to scale and large transportation costs. We investigate two
countries, N and S, each with two sectors. Manufacturing generates cross-border
pollution which reduces agricultural production. Firms can freely move across country
borders, but not workers. First, we show that pollution lowers local income since
it reduces agricultural production. This income-reduction effect discourages firms
to move to the country with laxer environmental regulations that generate more
pollution. Second, our analysis demonstrates that manufacturing agglomeration
forces can alleviate the pollution haven effect. And a pollution haven may not arise,
if environmental regulation is slightly more stringent in the larger country N than
in the smaller country S. These results are strongly supported by recent empirical
findings. In addition, the model predictions call for international cooperation of
environmental policies, especially when trade becomes freer.
Dao-Zhi ZENG
Graduate School of Management, Kagawa University
Laixun ZHAO
Research Institute for Economics and Business Administration
Kobe University
Rokkodai-cho, Nada-ku, Kobe
657-8501
Japan
Phone: (81) 78 803 7036
Fax: (81) 78 803 7059