Abstract.  The purpose of this article is to analyse the effect of the externalities of industrial pollution on trade patterns and economic geography. Many researchers have studied the effects of agglomeration on regional systems. Krugman (1991) applied the monopolistic competition model to international trade and has thereby contributed to this category of inquiry. However, that study did not treat the agricultural sector as important. Similarly, environmental factors are ignored in most studies of that literature. Industrial agglomeration affects the productivities of other sectors via air pollution, water pollution, and so on. We introduce the environmental factor into the new economic geography model and analyse the effects of the environmental damage on the distribution between regions, and the effect of the environmental tax. After analysing the case without migration in the short run, we discuss the long run case in which households can move freely among regions. We derive the same equilibrium pattern of population distribution.

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