We explain the spatial concentration of economic activity, in a model of economic geography, when the cost of environmental policy - which is increasing in the concentration of pollution - acts as a centrifugal force, while positive knowledge spillovers and a site with natural cost advantage act as centripetal forces. We study the agglomeration eects caused by trade-os between centripetal and centrifugal forces which eventually determine the distribution of economic activity across space. The rational expectations market equilibrium with spatially myopic environmental policy results either in a monocentric or in a polycentric city with the major cluster at the natural advantage site. The regulatorÃƒÂ¢Ã¯Â¿Â½Ã¯Â¿Â½s optimum results in a bicentric city which suggests that when environmental policy is spatially optimal, the natural advantage sites do not act as attractors of economic activity.Agglomeration, Space, Environmental policy, Natural cost advantage, Knowledge spillovers, Monocentric-bicentric city
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