This paper first develops a model to characterize the equilibrium distribution of polluting and nonpolluting firms and then turns to the larger question of whether the equilibrium distribution is socially optimal. We find that the equilibrium distribution of polluting firms differs from the social optimum when they generate a large amount of stationary pollution and have much higher or lower productivity than clean firms. In these cases, conventional pollution control approaches generally do not bring about an optimal distribution. Consideration of transport costs along with productivity and pollution changes some of the classic results of the new economic geography literature.