Wu and Collaborators Receive AAEA Quality of Research Discovery Honorable Mention

ARE Department Head Junjie Wu was recently honored along with collaborators Kathleen Segerson and Chunhua Wang with the Agricultural & Applied Economics Association’s Quality of Research Discovery Award Honorable Mention for their 2023 paper, “Is Environmental Regulation the Answer to Pollution Problems in Urbanizing Economies?” published in the Journal of Environmental Economics and Management.

Severe air pollution in major cities of developing countries is a critical environmental issue, with almost all of the top 25 most polluted cities in the world located in these nations, and China and India accounting for most of them. Despite many implementing significant policy measures, their air pollution problems persist. In their paper, Wu, Segerson and Wang investigate why environmental quality improvements are challenging in emerging economies and seek to inform better policy design.

The paper introduces a model of an economy affected by pollution and agglomeration economies to evaluate the effectiveness of environmental policies. It compares uniform emission standards or taxes applied across all regions with differentiated standards that are stricter in more polluted areas. The analysis considers scenarios with fixed firm locations and those where firms can relocate based on profit, cost of living and environmental quality.

A key finding is that the interaction between environmental regulation and agglomeration economies contributes to persistent pollution in emerging economies. While regulations may be effective in the short term, firm relocation can undermine their effectiveness, potentially worsening pollution. This occurs because cleaner technologies lower agglomeration costs, leading to higher concentrations of economic activity that can offset the benefits of regulation, resulting in “environmental stagnation.”

The paper further explores this dynamic through empirical analysis of water pollution regulation in China, providing evidence that the impact of such regulation is influenced by agglomeration economies. It demonstrates that polluting firms incur lower abatement costs in regions with larger agglomeration economies, emphasizing the need to consider these factors when designing environmental policies. The findings offer insights into the challenges of achieving environmental improvements in developing countries and suggest crucial policy implications.