Pollution Havens and Industrial Agglomeration


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.

Keywords: Pollution
       Industrial Agglomeration
       Trade Costs
JEL Classification: Q5, R3

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