Urban environmental externalities, agglomeration forces, and the technological ‘deus ex machina’

The aim of this paper is to analyze and depict urban equilibrium from the perspective of a complex force field between (positive) agglomeration economies and (negative) environmental externalities. Based on a simplified representation of a linear urban economy, a general-equilibrium model is designed and its properties are investigated by using numerical simulations. The model includes a spacious industrial centre, in which agglomeration externalities are differentiated over space, and a residential area that suffers from pollution, which is also differentiated over space. For the sake of simplicity urban environmental externalities are analyzed as being proportional to fossil fuel use, so that energy taxes would be a logical instrument. Environmental technology choice by firms is used as a tool for coping with environmental externalities, and is endogenized. Using this model we are able to generate interesting and sometimes surprising results for the city under consideration.