Location Decisions of U.S. Polluting Plants: Theory, Empirical Evidence, and Consequences

Abstract

Economists have long been interested in explaining the spatial distribution of economic activity, focusing on what factors motivate profit-maximizing firms when they choose to open a new plant or expand an existing facility. We begin our paper with a general discussion of the theory of plant location, including the role of taxes and agglomeration economies. However, our paper focuses on the theory, evidence, and implications of the role of environmental regulations in plant location decisions. On its face, environmental regulation would not necessarily be expected to alter location decisions, since we would expect Federal regulation to affect all locations in the United States essentially equally. It turns out, however, that this is not always the case as some geographic areas are subject to greater stringency. Another source of variation is differences across states in the way they implement and enforce compliance with Federal regulation. In light of these spatial differences in the costs of complying with environmental regulations, we discuss three main questions in this survey: Do environmental regulations affect the location decisions of polluting plants? Do states compete for polluting plants through differences in environmental regulation? And, do firms locate polluting plants disproportionately near poor and minority neighborhoods?