Environmental Policy, Industry Agglomeration, and Regional Industry Transfer -A Perspective of New Economic Geography

In this paper, the author discusses the effects of environmental policy differences on regional distribution of the manufacturing sector, and the industrial structure change in each region. The author finds out that the regional industry structure is very sensitive to environmental policy differences, while the distribution of the manufacturing sector is not. It provided a possible explanation for the phenomenon that "pollution moving westward, while high-tech industry moving eastward and production agglomerate in east area". Based on New Economic Geography (NEG) framework, the author builds a two-region, two-sector, two-factor model. Then, the author divided the manufacturing sector into two industries, high-pollution and low-pollution. The policy implication of this multi-industry NEG model is that even regardless of the externality brought about by environmental pollution, it will be effective for western local government to attract manufacturing firms by relaxing the environmental policy. Because only the "dirty" industry will be attracted, while on contrary, the "clean" industry will be turned away. And as a result, there will be no increase of the local share of manufacturing output.