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Can Welfare Be Improved By Relocating Firms? The Case Of The Constructed Capital Model

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  • Egle Tafenau

Abstract

In the literature of new economic geography several authors have shown that a benevolent social planner would choose a different spatial distribution of economic activity than the one achieved through market forces. So far little has been done to evaluate the welfare effects of specific redistribution policies. This is the main contribution of the paper. We look at two policy schemes: location permits policy and a tax-subsidy policy in the context of the constructed capital model (due to Baldwin 1999). It is shown that with a tax on final consumption expenditures and a capital subsidy there is more room for welfare improvement than under the location permits policy due to increased variety of goods. Nevertheless, relying on the numerical simulations, no situation is possible where the residents of both regions would gain from the policy. Also compensated Pareto improvements are unachievable.

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Paper provided by Faculty of Economics and Business Administration, University of Tartu (Estonia) in its series University of Tartu - Faculty of Economics and Business Administration Working Paper Series with number 64.

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Length: 44 pages
Date of creation: 2008
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Handle: RePEc:mtk:febawb:64

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  1. Krugman, Paul, 1991. "Increasing Returns and Economic Geography," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 483-99, June.
  2. J.Peter Neary, 2001. "Of Hype and Hyperbolas: Introducing the New Economic Geography," Journal of Economic Literature, American Economic Association, vol. 39(2), pages 536-561, June.
  3. OTTAVIANO, Gianmarco & THISSE, Jacques-François, 1999. "Agglomeration and trade revisited," CORE Discussion Papers 1999041, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. Martin, Philippe & Rogers, Carol Ann, 1995. "Industrial location and public infrastructure," Journal of International Economics, Elsevier, vol. 39(3-4), pages 335-351, November.
  5. Richard E. Baldwin, 1998. "Agglomeration and Endogenous Capital," NBER Working Papers 6459, National Bureau of Economic Research, Inc.
  6. Vincent Dupont & Philippe Martin, 2006. "Subsidies to poor regions and inequalities: some unpleasant arithmetic," Journal of Economic Geography, Oxford University Press, vol. 6(2), pages 223-240, April.
  7. CHARLOT, Sylvie & GAIGNE, Carl & ROBERT-Nicoud, Frederic & THISSE, Jacques-François, . "Agglomeration and welfare: the core-periphery model in the light of Bentham, Kaldor, and Rawls," CORE Discussion Papers RP -1857, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  8. Baldwin, Richard E. & Martin, Philippe, 2004. "Agglomeration and regional growth," Handbook of Regional and Urban Economics, in: J. V. Henderson & J. F. Thisse (ed.), Handbook of Regional and Urban Economics, edition 1, volume 4, chapter 60, pages 2671-2711 Elsevier.
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