Is Environmental Regulation the Answer to Pollution Problems in Urbanizing Economies

This paper seeks to better understand the persistent environmental problems in urbanizing economies. We examine the effectiveness of environmental policy in an economy with agglomeration economies and endogenous firm relocation and entry/exit. We show that, although environmental regulation is effective in the short run, for economies that are urbanizing and characterized by partial agglomeration it may instead exacerbate pollution problems once endogenous firm relocation/entry/exit occurs. We present initial empirical evidence in the context of water pollution in China that demonstrates the importance of agglomeration economies in determining the impacts of environmental regulation