Environmental Policy, Spatial Spillovers and the Emergence of Economic Agglomerations
44 Pages Posted: 7 Oct 2009
Date Written: September 15, 2009
We explain the spatial concentration of economic activity, in a model of economic geography, when the cost of environmental policy - which is increasing in the concentration of emissions - and an immobile production factor act as centrifugal forces, while positive knowledge spillovers and iceberg transportation costs act as centripetal forces. We study the agglomeration effects caused by trade-offs between centripetal and centrifugal forces. The above effects govern firms’ location decisions and as a result, they define the distribution of economic activity across space. We derive the rational expectations equilibrium and the social optimum, compare the outcomes and characterize the optimal spatial policies.
Keywords: Agglomeration, Spatial Economics, Environmental Policy, Knowledge Spillovers, Transportation Cost
JEL Classification: R3, Q5, H2
Suggested Citation: Suggested Citation