Pollution Taxes and Location Decision under Free Entry Oligopoly

This paper examines the impact of a pollution tax as a pollution control device on the output and location decisions of undifferentiated oligopolistic firms with free entry. It shows that the optimum output and location of an oligopolistic firm is independent of a change in the pollution tax if the demand function is linear. Furthermore, an increase in the pollution tax will increase (decrease) output and move the plant location toward (away from) the CBD if the demand function is concave (convex). It also shows that a higher pollution tax will increase the pollution damage if the demand function is linear and the location effect dominates the demand effect. These results are significantly different from the conventional results based on the monopolistic location model. It indicates that the demand condition plays an important role in the determination of the impact of a pollution tax on the location decision of an oligopolistic firm and the pollution damage to the CBD residents