Economic Agglomeration and Environmental Policy

We explain the spatial concentration of economic activity, in a model of economic geography, when the cost of environmental policy- which is increas-ing in the concentration of pollution- acts as a centrifugal force, while positive knowledge spillovers and iceberg transportation costs act as centripetal forces. We study the agglomeration effects caused by trade-offs between centripetal and centrifugal forces. The above effects govern firms ’ location decisions and as a result, they define the distribution of economic activity across space