Tanneries in Kanpur and Pollution in the Ganges : A Theoretical Analysis

We study pollution in the Ganges river caused by tanneries in the city of Kanpur in India. Two tanneries, A and B, are located on the same bank of the Ganges in Kanpur. Both produce leather and the production of leather requires the use of chemicals that are toxic to humans. Tannery A is located upstream from tannery B. Tannery A's leather production depends directly only on labor use but tannery B's leather production depends on labor use, the chemical waste generated by tannery A, and the natural pollution absorbing capacity of the Ganges. In this setting, we accomplish three tasks. First, we determine the equilibrium production of leather by both tanneries in the benchmark case in which there is no pollution. Second, we ascertain how the benchmark equilibrium is altered when tannery B accounts for the negative externality imposed on it by tannery A. Finally, we analyze what happens to leather production and to labor use when the two tanneries merge and then we discuss some policy implications emanating from our research