Effects of pollution on industrial location

Abstract

This dissertation is an extension of spatial microeconomic theory as described by Melvin L. Greenhut in A Theory of the Firm in Economic Space. The research objective is: (1) to develop the theory of economic externalities in the context of spatial theory, then (2) to point out the resulting inadequacy of non-spatially derived recommendations about pollution when firms and consumers are considered to be separated by costly geographic distances. There is general agreement that the effect of an ad valorem tax (subsidy) on a region is exit (entry). This dissertation shows that, in addition, each remaining firm produces a greater (smaller) individual output, a result which is at variance with classical analysis. The traditional conclusion obtains because a tax (subsidy) shifts the marginal cost curve along a stationary marginal revenue curve to a smaller (larger) equilibrium output. Spatial equilibrium requires that the revenue curves also shift in response to exit (entry), with the final stable position as noted. The effect on total regional output of a tax (subsidy), therefore, is increased (decreased) individual outputs and fewer (more) firms. An "elasticity of entry" coefficient defines which of the two effects dominates. Spatial analysis introduces a new explicit tool for output adjustment, the level of uncertainty. Uncertainty increase (decrease) does not affect individual output but it does reduce (increase) the number of firms in the industry, hence total regional output. The combined effect on regional output of varying taxes (subsidies) and uncertainty is described by another coefficient, the "total elasticity of entry.."