Pollution-reducing infrastructure is introduced in a general spatial equilibrium model of a monocentric city as a public good which serves to abate polluting emissions from households' consumption. This is an innovative extension to an urban economics model and motivated by stylized facts observed for the case of Bombay. It allows us to develop and analyse improved policy instruments to solve urban environmental problems.

We demonstrate how the optimal density of people, goods consumption, and pollution-reducing infrastructure are interrelated and spatially distributed. The public-good character of infrastructure is shown to favour an increased infrastructural density all over the city in response to increased population size. In two settings of public and private infrastructural supply, we derive three interrelated and spatially differentiated policy instruments, by which the optimal allocation is implemented as a spatial market equilibrium.