GEP Research Paper 02/27
Location Choice by Households and Polluting Firms: An Evolutionary Approach
B.R. Dijkstra and F.P. De Vries
Abstract
This paper examines several policy regimes to deal with the problem that households suffer from environmental damage by firms in the same region. Taxation gives firms and households an incentive to stay away from each other. Laissez faire (compensation) only gives households (firms) an incentive to stay away from firms (households). We employ an evolutionary framework to analyze migration movements in the course of time, since firms and households will not relocate immediately in response to payoff differentials. We find that taxation creates the right incentives to reach a local welfare maximum. However, compensation may lead to a better outcome than taxation.
Issued in December 2002.
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