Spatial Policies and Land Use Patterns: Optimal and Market Allocations

Environmental conditions and pollution levels have been proven to affect firms' and households' location decisions in various ways. In this paper, we study the optimal and equilibrium distribution of industrial and residential land in a given region. Industries produce a single good using land and labor and generate emissions of a pollutant, and households consume goods and residential land and dislike pollution. The trade-off between the agglomeration and dispersion forces, in the form of industrial pollution, environmental policy, production externalities, and commuting costs, determines the emergence of industrial and residential clusters across space. We also show that the joint implementation of a site-speci��c environmental tax and a site-specific labor subsidy can reproduce the optimum as an equilibrium outcome.