Pollution and land use: Optimum and decentralization

Richard Arnott, Oded Hochman, Gordon C. Rausser

Research output: Contribution to journalArticlepeer-review

31 Scopus citations


Space matters not only by inducing transport costs but also by mitigating pollution damages. Previous models of pollution either disregard space altogether or presume a predetermined separation between polluters and pollutees. In our model, workers commute to factories and all possible location combinations of housing and industry around a circle are considered. We investigate optimal allocations and their decentralization. The tradeoff between pollution costs and transport costs, along with the non-convexity inherent in spatial models, results in multiple local optima. With negligible commuting costs, the optimal allocation has one industrial and one residential zone. As commuting costs increase, the number of zones of each type increases until an allocation is reached in which housing and industry are completely intermixed. The global optimal allocation is decentralized by imposing a tax per unit area of industrial land at a particular location equal to the total damage caused by the pollution from that unit area, evaluated at the global optimum. Location-specific Pigouvian taxes by themselves are inefficient.

Original languageEnglish
Pages (from-to)390-407
Number of pages18
JournalJournal of Urban Economics
Issue number2
StatePublished - 1 Sep 2008


  • Agglomeration
  • Land use
  • Non-convexities
  • Pigouvian taxes
  • Pollution
  • Regulation
  • Space
  • Zoning

ASJC Scopus subject areas

  • Economics and Econometrics
  • Urban Studies


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