Capital Heterogeneity, Industrial Clusters and Environmental Consciousness

Capital Heterogeneity, Industrial Clusters and Environmental Consciousness

It is shown in the context of a new economic geography that when capital is heterogeneous - degree of environmental sensitivity - trade liberalization may lead to industrial agglomeration and inter-regional trade. Capital heterogeneity gives local monopsony power to firms but also introduces variations in the quality of the match. Matches occur, under environmental consciousness assumption, giving rise to an agglomeration force, which can offset the forces against, trade costs and the erosion of monopsony power. A robust agglomeration equilibrium is derived analytically and shows that pollution can provide a motive for trade by spatially concentrated industries with environmental sensitivities.