Environmental Policy and the Dynamics of Industrial Location and Residential Choice

Environmental issues have an international dimension, with causes and effects transcending borders. This study explores the impact of environmental regulations on the distribution of people and firms, particularly in relation to the pollution haven hypothesis. It posits that strict environmental regulations lead firms to relocate to regions with laxer regulations, thereby creating an uneven distribution of pollution. The paper examines how varying degrees of environmental regulation affect the long-term distribution of firms and people. The findings suggest that only highly uneven regulations align with the pollution haven hypothesis, causing firms to concentrate in regions with low environmental standards and people in regions with high standards. Conversely, moderate regulations improve environmental quality in both regions. The study highlights that as green technology standards increase, human capital is drawn to regions adopting these standards, although firms may relocate due to higher fixed costs. Overall, increasing reduces total polluting emissions by decreasing the number of firms.