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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
Date of revision:
Handle: RePEc:mtk:febawb:64

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  1. Ottaviano, Gianmarco Ireo Paolo & Thisse, Jacques-François, 1998. "Agglomeration and Trade Revisited," CEPR Discussion Papers 1903, C.E.P.R. Discussion Papers.
  2. Dupont, Vincent & Martin, Philippe, 2003. "Subsidies to Poor Regions and Inequalities: Some Unpleasant Arithmetic," CEPR Discussion Papers 4107, C.E.P.R. Discussion Papers.
  3. Krugman, Paul, 1991. "Increasing Returns and Economic Geography," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 483-99, June.
  4. Sylvie Charlot & Carl Gaigné & Frédéric Robert-Nicoud & Jacques-François Thisse, 2006. "Agglomeration and welfare: the core-periphery model in the light of Bentham, Kaldor, and Rawls," Working Papers 12374, Institut National de la Recherche Agronomique, France.
  5. J. Peter Neary, 2000. "Of Hype and Hyperbolas - Introducing the new Economic Geography," Working Papers 200019, School Of Economics, University College Dublin.
  6. Martin, Philippe & Rogers, Carol Ann, 1995. "Industrial location and public infrastructure," Journal of International Economics, Elsevier, vol. 39(3-4), pages 335-351, November.
  7. Richard E. Baldwin, 1998. "Agglomeration and Endogenous Capital," NBER Working Papers 6459, National Bureau of Economic Research, Inc.
  8. Baldwin, Richard & Martin, Philippe, 2003. "Agglomeration and Regional Growth," CEPR Discussion Papers 3960, C.E.P.R. Discussion Papers.
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