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The Gap between Free Market and Social Optimum in the Location Decision of Economic Activity

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  • Miki Malul

    (Department of Public Policy and Administration, Ben Gurion University, Beer Sheva, 84000, Israel, malul@som.bgu.ac.il)

  • Raphael Bar-El

    (Department of Public Policy and Administration, Ben Gurion University, Beer Sheva, 84000, Israel, rbarel@som.bgu.ac.il)

Abstract

This article presents a simplified model for comparison of the spatial distribution (core—periphery) of economic activity resulting from free market conditions, with the distribution that would lead to a social optimum. It further examines the public policy measures required to lead the economy towards the optimal distribution. Simulations are conducted to illustrate the mechanism of intervention of public policy and to test the feasibility of various measures. An important conclusion is that public investment in the creation of competitive ability in the periphery may provide the solution to market failure and therefore lead to the achievement of a social optimum greater than the free market optimum. Another preliminary conclusion is that public policy should consider a combination of measures (such as improving both regional infrastructure and the quality of the labour force), since focusing on a single measure may not be sufficient to achieve a social optimum.

Suggested Citation

  • Miki Malul & Raphael Bar-El, 2009. "The Gap between Free Market and Social Optimum in the Location Decision of Economic Activity," Urban Studies, Urban Studies Journal Limited, vol. 46(10), pages 2045-2059, September.
    • Handle: RePEc:sae:urbstu:v:46:y:2009:i:10:p:2045-2059
    DOI: 10.1177/0042098009339427
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    References listed on IDEAS

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    4. William F. Lever, 2013. "Evaluating the urban milieu of an individual city," Chapters, in: Peter Karl Kresl & Jaime Sobrino (ed.), Handbook of Research Methods and Applications in Urban Economies, chapter 15, pages 372-395, Edward Elgar Publishing.
    5. Mikhail Martynovich, 2017. "The role of local embeddedness and non-local knowledge in entrepreneurial activity," Small Business Economics, Springer, vol. 49(4), pages 741-762, December.
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    7. Miki Malul, 2012. "A Dynamic Brain Drain in Peripheral Regions," ERSA conference papers ersa12p230, European Regional Science Association.
    8. Shoham Amir & Rosenboim Mosi & Malul Miki & Saadon Yossi, 2011. "Core and Periphery -- The Dual Effect of Terror," Peace Economics, Peace Science, and Public Policy, De Gruyter, vol. 17(1), pages 1-15, September.

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