Department of Agricultural and Resource Economics

Previous analysis of pollution presumes separation between pollutees and polluters. In the model developed here, all possible combinations of housing and industry locations are allowed. In the resulting world of nonconvexities and multiple local optimum, Pigouvian taxes are generally insufficient. Accordingly, our analysis considers a wide range of policy instruments extending from Pigouvian taxes, double taxes, to zoning regulations. The results demonstrate that the management of pollution requires the recognition of two separate regimes determined by the type of convexity or concavity of the pollution dispersion function. When this function is convex, the optimal solution requires no zoning of housing. When the dispersion function is concave in emissions, the optimal allocation implies zoning into industrial and residential zones and, in some circumstances, taxes equal to total damages. To achieve effective management under limited information regarding the pollution dispersion function, it is argued that zoning restrictions cab be determined by trial and error through observation of changes in land rents.