Abstract
This paper considers pollution tax rate functions that decrease progressively with distance in order to examine in depth the effectiveness of pollution tax incentives. We find that pollution tax incentive policies, regardless of the level of incentives or the size of increases in incentives, can impel the firm to purchase anti-pollution equipment. However, increases in the size of incentives cause the firm to relocate back to city centers. The size of incentive increase thus has an uncertain impact on location choice, suggesting that increases may also produce the opposite of the intended effect by “pulling” plants back to city centers. This confirmed the argument of Oates and Baumol (Economic analysis of environmental problems, Columbia University Press, New York, 1975, p. 104) that taxes on polluting activities may fail to do their job with full effectiveness. In addition, we have also found that increased uncertainty over pollution tax policies tends to increase purchases of anti-pollution equipment for a risk-averse firm. This impact is unrelated to the investment flexibility of anti-pollution equipment. These results are different from those of Carlsson regarding risk-neutral firms. In addition, the findings of this study that increases in pollution taxes tend to cause a firm to purchase additional anti-pollution equipment and leave city centers differ from those of Hwang and Mai in the latter result.
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Notes
Though the regulator does not adopt an environmental policy of direct control, such as programs of zoning on polluting activities, he sets an unit pollution tax function to force the polluter to relocate and leave city centers via programs of taxation. This specification will be appropriately viewed as a mixed policy of tax incentives and direct controls, as mentioned by Oates and Baumol(1975, p. 105).
If the unit pollution tax function slope \(-1\) is set as the firm’s location limit \(\bar{{u}}\) where incentives begin to quickly increase, then \(z^{\prime }(\bar{{u}})=-z_1 -z_2 \bar{{u}}=-1\) can be used to solve \(\bar{{u}}={(1-z_1 )}/{2z_2 }\).The maximum taxation distance \(\hat{{u}}\) can be found using \(z(\hat{{u}})=0\).
A steeper slope of marginal production cost implies a lower flexibility of anti-pollution equipment investment. The concept is firstly provided by Stigler (1939).
In view of a greater scale of production leads to a higher relocation cost, we can follow Forslid and Okubo(2010, p. 6) to set a per unit of production fixed relocation cost function. That is, we decompose \(aQ\) in the profit function into two parts: \(aQ=a_1 Q-a_2 Q\), where \(a_1 Q\) is a part of revenue and \(-a_2 Q\) is the relocation cost. This specification will not change the theoretical results in our framework of spatial monopoly.
Since \(\pi =E(\pi )\) at \(\varepsilon =E(\varepsilon )\), by following Pratt(1964, p. 125), we expand \(U^{\prime }(\pi )\varepsilon \) and \(U^{\prime }(\pi )\) around \(\varepsilon =E(\varepsilon )\) in a small risk to obtain \({E[U^{\prime }(\pi )\varepsilon ]}/{E[U^{\prime }(\pi )]}={U^{\prime }[E(\pi )]E(\varepsilon )}/{U^{\prime }[E(\pi )]}=E(\varepsilon )=0\) approximately.
This assumption is similar to the concept of the open loop analysis in dynamic game setting in that the firm takes output of the second stage as given without taking into account the effect of anti-pollution equipment on output.
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We are very grateful to anonymous referees for their valuable comments and suggestions.
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Yang, BS., Mai, CC. The impact of uncertain environmental regulatory policy on optimal plant location and anti-pollution technology selection. Ann Reg Sci 50, 753–769 (2013). https://doi.org/10.1007/s00168-012-0520-6
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DOI: https://doi.org/10.1007/s00168-012-0520-6