Payments from Households to Distant Polluting Firms

Abstract We investigate a novel way to encourage separation between firms, causing local pollution, and their victims (households): payments from households distant polluting firms. These do not require monitoring of firms’ emissions or abatement costs. In our model, firms can choose two locations (A B, with A larger than B). Households incur environmental damage in the same location. Under laissez faire, one location (say A) other B) will prompt move B stay there, thus reducing A. The maximum that are willing pay temporarily is amount currently makes them indifferent B. make less attractive as well households. unique positive-payment equilibrium implements global welfare optimum where faire does not. examine which starting points this payment be reached.