School Brown Bag: Bouwe Dijkstra

Payments from households to distant polluting firms

Abstract:  We present a model where households and polluting firms can choose from two locations (A and B). Households incur environmental damage from firms in the same location. Under laissez faire, payments from households in one location (say A) to firms in the other location (B) will prompt firms to move from A to B and to stay there, thus reducing damage to households in A. A necessary condition for these payments is that households prefer A to B. The payments make A less attractive to firms as well as to households. The unique positive-payment equilibrium implements the global welfare optimum where laissez faire does not. We examine from which starting points this payment equilibrium can be reached.

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