Pollution-reducing infrastructure and urban environmental policy

Based on a case study on Bombay, we argue that urban infrastructure, like the sewage system and the municipal waste collection, is an important instrument for urban environmental policy. We develop a spatial general equilibrium model of a monocentric city, where infrastructure serves as a public means of abating pollution. Analyzing the optimal supply of pollution-reducing infrastructure, we conclude that it has to be geographically differentiated, even if pollution is homogenous. In a city with a growing population the provision of infrastructure has to be changed throughout the city, not only in newly inhabited areas. Urban environmental policies, based on Pigouvian taxes and pollution-reducing infrastructure, are mutually dependent. In two settings of public or private infrastructure, we show that fiscal environmental policies have to be spatially differentiated, and that income transfers are necessary in order to implement the first best allocation as a residential market equilibrium.