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Second-Best Cost?Benefit Analysis with a Microfoundation of Urban Agglomeration

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  • Yoshitsugu Kanemoto

    (National Graduate Institute for Policy Studies)

Abstract

Many sources of urban agglomeration, such as the gains from variety, bette rmatching, and knowledge creation and diffusion, involve departures from the first-best world. Benefit evaluation of a transportation project must then take into account changes in excess burden along with any direct user benefits. A number of economists have addressed this issue, and policymakers in some countries, such as in the United Kingdom, have been attempting to include these considerations in their project assessments. By modeling the microstructure of agglomeration economies, we derive second-best benefit evaluation formulae for urban transportation improvements. Previous work has investigated the same problem, but without explicitly modeling the sources of agglomeration economies. Accordingly, our analysis examines whether earlier results remain valid when monopolistic competition with differentiated products provides the microfoundation of the agglomeration economies. By explicitly introducing the rural sector and multiple cities, we also show that the agglomeration benefits depend on where the new workers are from.

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Bibliographic Info

Paper provided by National Graduate Institute for Policy Studies in its series GRIPS Discussion Papers with number 11-03.

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Length: 16 pages
Date of creation: May 2011
Date of revision:
Handle: RePEc:ngi:dpaper:11-03

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Keywords: cost-benefit analysis; agglomeration economies; monopolistic competition; new economic geography; second-best economies;

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  1. Yoshitsugu Kanemoto, 1985. "Optimal Cities with Indivisibility in Production and Interactions Between Firms," Working Papers 597, Queen's University, Department of Economics.
  2. Roger Vickerman, 2007. "Recent Evolution of Research into the Wider Economic Benefits of Transport Infrastructure Investments," OECD/ITF Joint Transport Research Centre Discussion Papers 2007/9, OECD Publishing.
  3. Giles Duranton & Diego Puga, 2003. "Micro-Foundations of Urban Agglomeration Economies," NBER Working Papers 9931, National Bureau of Economic Research, Inc.
  4. Tabuchi, Takatoshi & Yoshida, Atsushi, 2000. "Separating Urban Agglomeration Economies in Consumption and Production," Journal of Urban Economics, Elsevier, vol. 48(1), pages 70-84, July.
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Cited by:
  1. Wouter Vermeulen, 2011. "Agglomeration Externalities and Urban Growth Controls," CPB Discussion Paper 191, CPB Netherlands Bureau for Economic Policy Analysis.
  2. Wouter Vermeulen, 2011. "Agglomeration Externalities and Urban Growth Controls," SERC Discussion Papers 0093, Spatial Economics Research Centre, LSE.

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