No.211 A Spatial Equilibrium Analysis of Air Pollution in China

We construct a spatial equilibrium model with endogenous air pollution as a by-product of production and consumption, where spatially mobile skilled and unskilled workers are affected negatively but heterogeneously by air pollution. Using a calibrated version of the model based on data for China in 2010, we show that strict regulation can be a centripetal force that attracts workers and production toward the regulated place, while reducing the local and over all emission of pollutants.

This result is in contrast to the insights of traditional theories that see environmental regulation as a centrifugal force for the local economy. The migration of workers who care environmental quality, input-output linkages in domestic trade networks, and openness to international trade, work in the mechanism delivering this result. We then consider a hypothetical policy to reduce national industrial emission by 10 percent and compare strategies on how to allocate reduction responsibilities across cities. We find that concentrating responsibility in a limited number of rich cities may outperform a more equal allocation in terms of welfare and economic output.

Keywords: China, Air Pollution, Domestic migration, Spatial equilibrium model, Environmental regulation