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Integration, Agglomeration and Welfare

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  • Pflüger, Michael P.

    ()
    (University of Würzburg)

  • Suedekum, Jens

    ()
    (Heinrich Heine University Düsseldorf)

Abstract

This paper studies the social desirability of agglomeration and the efficiency arguments for policy intervention in a simple, analytically solvable ‘new economic geography’ model with two trade integrating regions. The location pattern emerging as market equilibrium is “bubbleshaped”, i.e. it features dispersion of firms both at high and low trade costs and stable equilibria with partial agglomeration of firms in addition to core-periphery equilibria for intermediate levels of trade costs. Our central finding is that the market equilibrium is characterised by over-agglomeration for high trade costs and under-agglomeration for low trade costs. For very high and very low levels of trade costs as well as for an intermediate range of trade costs, the market equilibrium yields the socially optimal degree of agglomeration. An important implication of this result is that, on efficiency grounds, regional policy should foster the dispersion of firms for a range of high trade costs only, but agglomeration for a range of low trade costs. Hence, regional policies, such as those pursued by the European Union which are aimed at fostering dispersion in general, are counterproductive when trade integration is deep enough.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 1326.

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Length: 28 pages
Date of creation: Oct 2004
Date of revision:
Publication status: published in: Journal of Urban Economics, 2008, 63 (2), 544-566
Handle: RePEc:iza:izadps:dp1326

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Keywords: welfare; optimal agglomeration; economic geography; regional policy;

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Citations

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Cited by:
  1. Matthias Wrede, 2013. "Heterogeneous skills and homogeneous land: segmentation and agglomeration," Journal of Economic Geography, Oxford University Press, vol. 13(5), pages 767-798, September.
  2. Calin Arcalean & Gerhard Glomm & Ioana Cosmina Schiopu, 2012. "Growth Effects of Spatial Redistribution Policies," CESifo Working Paper Series 3728, CESifo Group Munich.
  3. Rainald Borck & Hyun-Ju Koh & Michael Pflüger, 2009. "Inefficient Lock-in and Subsidy Competition," CESifo Working Paper Series 2592, CESifo Group Munich.
  4. Kurata, Hiroshi & Nomura, Ryoichi, 2011. "A Chamberlinian Agglomeration Model with External Economies of Scale," Discussion paper series. A 242, Graduate School of Economics and Business Administration, Hokkaido University.
  5. Broll, Udo & Roldán-Ponce, Antonio & Wahl, Jack E., 2012. "Regional investment under uncertain costs of location," Dresden Discussion Paper Series in Economics 01/12, Dresden University of Technology, Faculty of Business and Economics, Department of Economics.
  6. Broll, Udo & Roldán-Ponce, Antonio & Wahl, Jack E., 2007. "Barriers to Diversification and Regional Allocation of Capital," Dresden Discussion Paper Series in Economics 14/07, Dresden University of Technology, Faculty of Business and Economics, Department of Economics.
  7. Fabien CANDAU, 2011. "Is Agglomeration Desirable ?," Annales d'Economie et de Statistique, ENSAE, issue 101-102, pages 203-228.
  8. G. Rayp & B. Vanbergen, 2009. "Are social welfare states facing a race to the bottom? A theoretical perspective," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 09/572, Ghent University, Faculty of Economics and Business Administration.
  9. Broll, Udo & Roldán-Ponce, Antonio & Wahl, Jack E., 2010. "Spatial allocation of capital: The role of risk preferences," Dresden Discussion Paper Series in Economics 03/10, Dresden University of Technology, Faculty of Business and Economics, Department of Economics.
  10. Jun Oshiro, 2011. "Tariff Policy and Transport Costs under Reciprocal Dumping," Discussion Papers in Economics and Business 11-17, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
  11. Georg Hirte & Christian Lessmann, 2014. "Trade, Integration, and Interregional Inequality," CESifo Working Paper Series 4799, CESifo Group Munich.
  12. Schaeffer, Y. & Charlot, S., 2012. "Inequality aversion, income redistribution and economic geography," Working Papers 201204, Grenoble Applied Economics Laboratory (GAEL).
  13. Theresa Grafeneder-Weissteiner & Ingrid Kubin & Klaus Prettner & Alexia Prskawetz & Stefan Wrzaczek, 2012. "Coping with Inefficiencies in a New Economic Geography Model," Working Papers 1204, Vienna Institute of Demography (VID) of the Austrian Academy of Sciences in Vienna.
  14. Hirte, Georg & Stephan, Andreas, 2014. "Regionale Beschäftigungswirkungen von öffentlichen Investitionen in Straßen- und Schieneninfrastruktur," Discussion Papers 2/2014, Dresden University of Technology, Faculty of Transportation and Traffic Sciences "Friedrich List", Institute for Transport and Economics.

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