Handbook of Environmental and Resource Economics
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Handbook of Environmental and Resource Economics

Edited by Jeroen C.J.M. van den Bergh

This major reference book comprises specially commissioned surveys in environmental and resource economics written by an international team of experts. Authoritative yet accessible, each entry provides a state-of-the-art summary of key areas that will be invaluable to researchers, practitioners and advanced students.
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Chapter 39: Location Choice, Environmental Quality and Public Policy(K.J. Button and P. Rietveld)

J.R. Markusen


39 Location choice, environmental quality and public policy James R. Markusen 1. Introduction Much of the literature in environmental economics and indeed in public finance and international trade abstracts from the location decisions of individual firms. Yet the possibility that individual plants may relocate in response to environmental costs has clearly been a concern of public policy. Often these concerns are expressed at a relatively local level, where a single plant can be a major employer. But in the last few years, these concerns have been expressed at a national level in the US and Europe. The possibility of US plants relocating Mexico was an issue in the NAFTA debate, and possible relocations by European firms to Eastern Europe concern the EU. The purpose of this chapter is to consider the location decisions of footloose firms in response to environmental costs imposed by regulatory standards or taxes. To accomplish this purpose we require a conceptual and modelling approach that includes several elements. First, in so far as the model requires that individual firms can be identified and plant location decisions are meaningful, production technology must be characterized by increasing returns to scale. In traditional neoclassical general equilibrium trade theory with constant returns to scale, only ‘industries’ can be identified and a firm’s plant location decision is not a meaningful concept. Increasing returns to scale in turn implies that market structure will be characterized by imperfect competition. Second, in so far as the policy debate frequently mentions multinationals, we must include...

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