“Location choice by households and polluting firms:
An evolutionary approach”
Bouwe Dijkstra (University of Nottingham)
Rome, May 9th 2017
14-16
Room C, second floor, building B,
School of Economics, University of Rome “Tor Vergata”
Abstract: We examine several policy regimes to deal with the problem of households suffering from environmental damage by firms in the same region. We employ an evolutionary framework to analyze migration movements in the course of time, since firms and households will not relocate immediately in response to payoff
differentials. We show that taxation gives firms and households an incentive to stay away from each other.
Laissez faire (compensation) only gives households (firms) an incentive to stay away from firms (households).
We find that taxation creates the right incentives to reach a local welfare maximum. However, when there are
multiple local maxima, circumstances may arise under which compensation leads to a better outcome than taxation.
Under laissez faire, payments from households in one region (say A) to firms in the other region (say B) will
prompt firms to move from A to B and to stay there, thus reducing damage to households in A. A necessary
condition for these payments is that households prefer A to B. When payments start from a laissez-faire evolutionary equilibrium (where nobody is inclined to move), they implement the welfare optimum. When the payments start while firms and households are still moving between locations, they might set society on the path
to a completely different and new equilibrium.
CEIS— University of Tor Vergata— Research Area: Energy, Land and Environmental Economics (ELEE)
Via Columbia, 2, 00133 ROME—TEL: +39 0672595601- [email protected] — www.ceistorvergata.it