Atmospheric pollution in rapidly growing industrial cities: spatial policies and land use patterns

We study the optimal and equilibrium distribution of industrial and residential land in a given region. The trade-off between agglomeration and dispersion forces in the form of pollution from stationary forces, production externalities and commuting costs, determines the emergence of industrial and residential clusters across space. In this context, we define two kinds of spatial policies that can be used in order to close the gap between optimal and market allocations. More specifically, we show that the joint implementation of a site-specific environmental tax and a site-specific labor subsidy can reproduce the optimum as an equilibrium outcome. The methodological approach followed in this article allows for an endogenous determination of land use patterns.