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City size and the Henry George theorem under monopolistic competition

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  • BEHRENS, Kristian
  • MURATA, Yasusada

Abstract

We analyze the equilibrium and the optimal resource allocations in a monocentric city under monopolistic competition. Unlike the constant elasticity of substitution (CES) case, where the equilibrium markups are independent of the city size, we present a variable elasticity of substitution (VES) case where the equilibrium markups fall with the city size. We then show that,due to excess entry triggered by such pro-competitive effects, the 'golden rule' of local public finance, i.e., the Henry George theorem (HGT), does not hold in the second best. We finally prove, within our framework, that the HGT holds in the second best if and only if: (i) the second-best allocation is first-best efficient, which turns out to be equivalent to the CES case;or (ii) a marginal change in the city size has no impact on equilibrium product diversity at the second best.

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Bibliographic Info

Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2007063.

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Date of creation: 01 Aug 2007
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Handle: RePEc:cor:louvco:2007063

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Keywords: city size; Henry George theorem; monopolistic competition; first-best and second-best allocations; variable elasticity;

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References

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  3. repec:bla:restud:v:73:y:2006:i:3:p:549-576 is not listed on IDEAS
  4. Behrens, Kristian & Kanemoto, Yoshitsugu & Murata, Yasusada, 2010. "The Henry George Theorem in a second-best world," CEPR Discussion Papers 8120, C.E.P.R. Discussion Papers.
  5. Paul Krugman, 1990. "Increasing Returns and Economic Geography," NBER Working Papers 3275, National Bureau of Economic Research, Inc.
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  18. Murata, Yasusada & Thisse, Jacques-Francois, 2005. "A simple model of economic geography a la Helpman-Tabuchi," Journal of Urban Economics, Elsevier, vol. 58(1), pages 137-155, July.
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Cited by:
  1. Kristian Behrens & Yoshitsugu Kanemoto & Yasusada Murata, 2010. "The Henry George Theorem in A Second-Best World," CIRJE F-Series CIRJE-F-773, CIRJE, Faculty of Economics, University of Tokyo.
  2. Amerighi, Oscar & Peralta, Susana, 2010. "The proximity-concentration trade-off with profit shifting," Journal of Urban Economics, Elsevier, vol. 68(1), pages 90-101, July.

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