Spatial Location Decisions under Environmental Policy and Housing Externalities

We study the internal structure of a city, in a model of economic geography, where industry and housing compete for scarce land to locate. We analyze a spatial model of a city in which a single good is produced using land, labor, machinery and emissions of a pollutant, and in which people consume goods, invest in housing services and dislike pollution. The agglomeration effects, caused by tradeoffs between centripetal and centrifugal forces, in the form of housing spillovers, stringency of environmental policy, transportation and commuting costs, determine
the emergence of industrial and residential clusters across space.