a b s t r a c tThis paper examines the pollution haven hypothesis using a spatial-economy model of two countries and two sectors. The manufacturing sector generates cross-border pollution which reduces cross-sectoral productivity of agricultural goods, and lowers local income. We derive a demand-reducing effect that discourages firms to move to the country with laxer environmental regulations, in the absence of any comparative advantage. Our analysis also demonstrates that manufacturing agglomeration forces can alleviate the pollution-haven effect: a pollution haven may not arise if environmental regulation is slightly more stringent in the larger country.

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Pollution-intensive industries are generally characterized by imperfect competition, increasing returns to scale and large transportation costs. We investigate two countries, N and S, each with two sectors. Manufacturing generates cross-border pollution which reduces agricultural production. Firms can freely move across country borders, but not workers. First, we show that pollution lowers local income since it reduces agricultural production. This income-reduction effect discourages firms to move to the country with laxer environmental regulations that generate more pollution. Second, our analysis demonstrates that manufacturing agglomeration forces can alleviate the pollution haven effect. And a pollution haven may not arise, if environmental regulation is slightly more stringent in the larger country N than in the smaller country S. These results are strongly supported by recent empirical findings. In addition, the model predictions call for international cooperation of environmental policies, especially when trade becomes freer.

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This paper studies the complexity of computing solution concepts for a cooperative game, called the minimum base game (MBG) (E; c), where its characteristic function c : 2 E 7 ! < is dened as c(S) = (the weight w(B) of a minimum weighted base B S), for a given matroid M = (E; I) and a weight function w : E 7 ! <. The minimum base game contains, as a special case, the minimum spanning tree game (MSTG) in an edge-weighted graph in which players are located on the edges. By interpreting solution concepts of games (such as core,-value and Shapley value) in terms of matroid theory, we obtain: The core of MBG is nonempty if and only if the matroid M has no circuit consisting only of edges with negative weights; Checking the concavity and subadditivity of an MBG can be done in oracle-polynomial time; The-value of an MBG exists if and only if the core is not empty, the-value of MSTG can be computed in polynomial time while there is no oracle-polynomial algorithm for a general MBG; Computing the Shapley value of an MSTG is #P-complete, and there is no oracle-polynomial algorithm for computing the Shapley-value of an MBG.