COMPETITION IN REGIONAL ENVIRONMENTAL POLICIES WHEN PLANT LOCATIONS ARE ENDOGENOUS

A two-region model is presented in which an imperfectly competitive fi rm produces a good with increasing returns at the plant level. Product ion of the good causes local pollution. The firm decides whether to ma intain plants in both regions, serve both regions from a single plant or shut down. If the disutility of pollution is high enough, the two r egions will compete by increasing their environmental taxes (standards ) until the polluting firm is driven from the market. Alternatively, i f the disutility from pollution is not as great, the regions will usua lly compete by undercutting each other's pollution tax rates.