Pollution-induced migration and environmental policy in an economic geography model

Abstract

This paper develops a two-region New Economic Geography model with polluting firms subject to regional abatement policies. Pollution accumulates in the local environment and decreases the welfare of the population. We show that environmental policies have two opposing effects on welfare: they reduce nominal wages and increase environmental quality. If environmental regulations are equally strict in the two regions then population, pollution and wages tend to converge as trade becomes more open. If the two regions have different but unambitious environmental regulations, firms agglomerate in the laxer region, which becomes a pollution haven. However, a sufficiently far-reaching environmental policy in one of the regions raises its environmental quality, increasing its attractiveness for population and firms, and the emergence of a pollution haven is avoided. We also show that if the natural absorption rate of pollution is low, the environment recovers slowly, population and firms move between regions in a pollute-and-flee cycle and no static equilibrium is reached.