ABSTRACT
A two-region model is presented in which an imperfectly competitive firm produces a good with increasing returns at the plant level. Production of the good causes local pollution. The firm decides whether to maintain plants in both regions, serve both regions from a single plant or shut down. If the disutility of pollution is high enough, the two regions will compete by increasing their environmental taxes (standards) until the polluting firm is driven from the market. Alternatively, if the disutility from pollution is not as great, the regions will usually compete by undercutting each other’s pollution tax rates.
