Manufacturing and agricultural pollution, private mitigation and wage inequality in the presence of pollution externalities

Abstract

The paper incorporates manufacturing and agricultural pollution into a three-sector general equilibrium model with pollution externalities both on agricultural production and labour health. Manufacturing generates pollution that affects agricultural production and health, while agriculture employs the pollutant as a factor for production that only affects health. Under the framework, this paper investigates the impacts of environmental protection policies and a rise in the self-mitigation cost of skilled and unskilled labour on wage inequality. A larger environmental tax expands wage gap if partial elasticity of substitution between labour and dirty input in the urban unskilled sector is small enough. More restrictive agricultural pollutants control narrows down the wage gap. The impact of an increase in the self-mitigation cost of skilled labour on wage inequality is ambiguous, depending on the factors substitution in agriculture and the elasticity of manufacturing pollution on agricultural production, while a larger self-mitigation cost of unskilled labour brings down the wage gap.