Space matters not only by inducing transport costs but also by mitigating pollution damages. Previous models of pollution either disregard space altogether or presume a predetermined separation between polluters and pollutees. In our model, workers commute to factories and all possible location combinations of housing and industry around a circle are considered. We investigate optimal allocations and their decentralization. The tradeoff between pollution costs and transport costs, along with the non-convexity inherent in spatial models, results in multiple local optima. With negligible commuting costs, the optimal allocation has one industrial and one residential zone. As commuting costs increase, the number of zones of each type increases until an allocation is reached in which housing and industry are completely intermixed. The global optimal allocation is decentralized by imposing a tax per unit area of industrial land at a particular location equal to the total damage caused by the pollution from that unit area, evaluated at the global optimum. Location-specific Pigouvian taxes by themselves are inefficient.
For many decades and throughout much of the world, the
tension between industrial pollution and households has been
crucial in urban areas. Some cities mainly in developed countries
(e.g., Washington DC, Stockholm, San Francisco, etc.)
have introduced green buffer zones between densely populated
areas and stationary pollution sources, while others have intermixed
polluting industry and households (e.g., Lima, Shanghai,
Bangkok, Moscow, etc.). What cities have come to recognize is
that space can and should be used as a means of controlling pollution.
Separating polluter and pollutee typically reduces pollution
damages but leads to increased commuting costs. When
pollution damages are low relative to transport costs, separation
into industrial and residential areas is uneconomic and uniform
distribution of industry and housing over space is economic.
However, above a certain threshold, the agglomeration of housing and industry in separate residential and industrial areas
becomes desirable. As pollution damages relative to transport
costs rise, separation into larger areas becomes efficient.
This paper focuses on the role of space in the control of pollution
externalities. Accordingly, we concentrate on pollution
from stationary sources and avoid dealing with congestion and
vehicles emissions in residential areas for which separation by
space does not reduce damages.1
The existing papers on spatial pollution from stationary
sources (Tietenberg, 1974a, 1974b, 1978; Henderson, 1977,
1985, 1996; Hochman and Ofek, 1979; and Baumol and Oates,
1988) have the common weakness that they all take the pattern
of land use between housing and industry as fixed, assuming
that housing is in one zone and industry is in another.
This paper characterized the social optimum in a spatial
economy with pollution, and its decentralization. Its main innovation
over previous literature is that land use is completely
endogenous. The model is of a ring-shaped economy with residential
and industrial land use. Employing a constant-returnsto-
scale technology, firms use land and labor to produce a
composite good, with emissions as an undesirable by-product.
Households supply fixed labor to firms, to which they commute,
derive utility from housing and the composite good, and
suffer disutility from the concentration of pollution at their
place of residence. The optimal land use pattern is then determined
by the tradeoff between pollution and commuting
costs. At one extreme, when transport costs are high, firms
and households are completely intermixed; commuting costs
are eliminated but pollution concentration at residential locations
is high. At the other extreme, when pollution is highly
noxious, households crowd together at one end of the ring and
firms at the other end, with buffer zones in between; commuting
costs are high but pollution concentrations at residential
locations low. Between these two extremes is a wide range
of possibly optimal land use patterns—different numbers of
pairs of residential and industrial zones, perhaps with buffer
zones.
Our specification of the mapping from the spatial distribution
of pollution emissions to the spatial distribution of pollution
concentrations is more general than previous specifications
in the literature, though still not completely general. Under our
specification, the global optimum can be decentralized with a
spatially differentiated tax per unit of industrial land set equal
to the additional damages caused by the total emissions from
the unit of land, evaluated at the social optimum. A spatially
differentiated Pigouvian tax—a tax on emissions—will not decentralize
the optimum.