Decentralized Pollution Standard Setting with Agglomeration Forces Present in a Model of Specific Firm Mobility

Abstract

Abstract Herein we augment the traditional devolved environmental interjurisdictional-competition model with specific firm mobility in the presence of agglomeration economies. Now the number of firms in a jurisdiction becomes pertinent in the story of decentralized efficiency. Specifically, when agglomeration forces are sufficiently strong, firm movement is subdued. Placed-based environmental policies aimed at swaying a firm's location decision are rendered relatively ineffective. As a result, jurisdictions possess incentives to excessively overprotect environmental quality − a race-to-the-top. Firm taxation effects on devolved efficiency are also examined. JEL classification numbers: Q51, Q58, R38. Keywords: Decentralized environmental regulation, Agglomeration economies, Firm location.