This paper examines several policy regimes to deal with the problem that households suffer from environmental damage by firms in the same region. Taxation gives firms and households an incentive to stay away from each other. Laissez faire (compensation) only gives households (firms) an incentive...

In a model where firms face a continuous choice of how much to invest in environmental innovation, we show that an ever stricter environmental policy does not always lead to ever cleaner production methods and ever lower production of polluting goods. It does so when the abatement technology is...