Optimal environmental and industrial policies and imperfect agglomeration effects

This paper examines a simple general equilibrium model that considers problems related to agglomeration, technology, and the environment. First, it is shown that the manufactured goods sector converts from classical technology with constant returns to scale to modern technology with increasing returns to scale as the regional population increases. The optimal pollution level might be an inverted-U shape with respect to population if optimal environmental policy is adopted. Second, the optimal population level of conversion is not attained in the market economy. The labour that is devoted to the manufactured goods sector in the market economy is too small. So, we derive the optimal subsidy rates to the manufactured goods sector to make resource allocation optimum. Third, we consider migration using the two-region model. One region becomes a large city and the other region becomes a rural area if the total population is large. The industrial policy tends to extend the population difference between city and rural areas. On the other hand, if the total population is small, a symmetric point will be stable equilibrium.