We specify a general equilibrium model of an open monocentric urban area with land, housing, and product markets, where the production process results in pollution that may be removed through an increasing-cost pollution control technology, or dissipated by exponential decay as distance from the noxious facilities increases. The effects of pollution may thereby be mitigated in three ways, lowering production, operating pollution control equipment, and spatial separation. Regulations that require firms to invest in pollution control have a variety of complex effects on land use and labor supply which can raise or lower output, employment and other indicators of urban economic performance.
We are particularly interested in the relationship between distance from the central business district where polluting firms are located and the density of population, along with the rental price of land, the price of housing, and the demand for housing services. Are there circumstances under which the polluting firms are surrounded by an undeveloped “fire break” of land which serves as a barrier between zones of production and residence? Changes in the level of pollution control cause changes in all specified features of the housing/real estate market. The purpose of this study is to trace the complex interactions between these variables.