Pollution Taxes and Optimal Spatial Location

Abstract

Most discussions of environmental externalities and pollution address a rather narrow problem: when a particular polluter damages a particular victim or pollutee, what type of pollution tax or other corrective measure will give the parties incentives to reduce pollution to a socially optimal level?1 In this paper we generalize that analysis. Rather than viewing the locations of polluters or pollutees as necessarily fixed, we regard the spatial location pattern as itself a tool for pollution control. Thus, pollution can be remedied in either of two ways: by polluters and/or pollutees changing their production technology to abate the damage (such as by polluters installing smoke-reducing equipment on smokestacks or pollutees installing smoke-screens), or by some of the parties relocating in such a way that technology changes become less costly or unnecessary. For example, a polluter could move to an area where there are fewer smoke-sensitive neighbours, or pollutees could move away from smoke-producing factories. We assume that, in at least some cases, relocation is a more efficient tool for reducing pollution than technology changes alone. In general, fixed-site abatement is more efficient only if proximate location enables both polluter and pollutee to reduce production costs. For example, both might gain from locating on nearby riverbank sites, the pollutee because it uses river water for transport and the polluter because it uses river water for cooling. None the less the polluter's smoke might damage the pollutee's product. Similarly, in urban areas we often find polluters and pollutees located close together because both benefit from the agglomeration economies and low transport costs in cities. However, where the production cost advantages of proximate location are small, it is efficient to reduce pollution by giving one of the parties an incentive to move. In this paper we explore the efficiency properties of pollution taxes. We use a dual criterion to judge their performance. First, pollution taxes should give polluters and pollutees occupying fixed locations incentives to abate pollution efficiently by modifying their production technology. A tax that does this is referred to as short-run efficient. Second, pollution taxes should give polluters or pollutees incentives to move if relocation is the more efficient means of reducing pollution damage and to locate where pollution abatement can be accomplished most efficiently when new location decisions are made. A tax that leads to an efficient spatial location pattern is referred to as efficient. In the paper we analyse both single and double pollution taxes; the former levied on polluters alone and the latter levied on both polluters and pollutees. The major result of the paper is that single pollution taxes do not lead to incentives for long-run efficient pollution abatement; i.e. they do not give