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Coping with Inefficiencies in a New Economic Geography Model

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Author Info

  • Theresa Grafeneder-Weissteiner
  • Ingrid Kubin
  • Klaus Prettner
  • Alexia Prskawetz
  • Stefan Wrzaczek

Abstract

This article introduces a social planner version of a model central to the New Economic Geography for explicitly answering whether the symmetric equilibrium outcome of the decentralized market economy is socially desirable. We find that savings incentives are too weak, resulting in an inefficiently low capital stock and therefore an inadequate number of product varieties. The optimal subsidy and taxation scheme to remedy these distortions resulting from the monopolistic competition structure is shown to be a sales subsidy financed by a lump-sum tax that results in marginal cost pricing. Interestingly, implementing this optimal policy might actually destroy the stability of the symmetric equilibrium and result in unintended agglomeration processes.

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Bibliographic Info

Paper provided by Vienna Institute of Demography (VID) of the Austrian Academy of Sciences in Vienna in its series Working Papers with number 1204.

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Length: 26 pages
Date of creation: May 2012
Date of revision:
Handle: RePEc:vid:wpaper:1204

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Web page: http://www.oeaw.ac.at/vid/

Related research

Keywords: New Economic Geography; Constructed Capital Model; Social Planner; Regional Policy; Agglomeration;

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References

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  1. OTTAVIANO, Gianmarco & THISSE, Jacques-François, . "Integration, agglomeration and the political economics of factor mobility," CORE Discussion Papers RP -1541, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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  4. Heijdra, Ben J., 2009. "Foundations of Modern Macroeconomics," OUP Catalogue, Oxford University Press, edition 2, number 9780199210695, October.
  5. OTTAVIANO, Gianmarco & TABUCHI , Takatoshi & THISSE, Jacques-François, . "Agglomeration and trade revisited," CORE Discussion Papers RP -1553, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  6. Paul Krugman & Anthony J. Venables, 1995. "Globalization and the Inequality of Nations," NBER Working Papers 5098, National Bureau of Economic Research, Inc.
  7. Thomas Fent & Belinda Aparicio Diaz & Alexia Prskawetz, 2013. "Family policies in the context of low fertility and social structure," Demographic Research, Max Planck Institute for Demographic Research, Rostock, Germany, vol. 29(37), pages 963-998, November.
  8. TABUCHI, Takatoshi & THISSE, Jacques-François, 2001. "Taste heterogeneity, labor mobility and economic geography," CORE Discussion Papers 2001044, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  9. 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.
  10. Florin O. Bilbiie & Fabio Ghironi & Marc J. Melitz, 2008. "Monopoly Power and Endogenous Product Variety: Distortions and Remedies," NBER Working Papers 14383, National Bureau of Economic Research, Inc.
  11. Krugman, Paul, 1991. "Increasing Returns and Economic Geography," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 483-99, June.
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  13. Benassy, Jean-Pascal, 1991. "Monopolistic competition," Handbook of Mathematical Economics, in: W. Hildenbrand & H. Sonnenschein (ed.), Handbook of Mathematical Economics, edition 1, volume 4, chapter 37, pages 1997-2045 Elsevier.
  14. Gustav Feichtinger & Michael Kuhn & Alexia Prskawetz & Stefan Wrzaczek, 2011. "The reproductive value as part of the shadow price of population," Demographic Research, Max Planck Institute for Demographic Research, Rostock, Germany, vol. 24(28), pages 709-718, May.
  15. Judd, Kenneth L, 1985. "On the Performance of Patents," Econometrica, Econometric Society, vol. 53(3), pages 567-85, May.
  16. Baldwin, Richard, 1998. "Agglomeration and Endogenous Capital," CEPR Discussion Papers 1845, C.E.P.R. Discussion Papers.
  17. repec:fth:iniesr:430 is not listed on IDEAS
  18. ,, 2009. "Foundations of Modern Macroeconomics Text & Manual Set," OUP Catalogue, Oxford University Press, edition 2, number 9780199564392, October.
  19. Martin, Philippe & I.P. Ottaviano, Gianmarco, 1999. "Growing locations: Industry location in a model of endogenous growth," European Economic Review, Elsevier, vol. 43(2), pages 281-302, February.
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  21. Fr�d�ric Robert-Nicoud, 2006. "Agglomeration and Trade with Input–Output Linkages and Capital Mobility," Spatial Economic Analysis, Taylor & Francis Journals, vol. 1(1), pages 101-126.
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Cited by:
  1. Maria Rita Testa & Stuart Basten, 2012. "Have Lifetime Fertility Intentions Declined During the “Great Recession”?," Working Papers 1209, Vienna Institute of Demography (VID) of the Austrian Academy of Sciences in Vienna.
  2. Gustav Feichtinger & Alexia Prskawetz & Andrea Seidl & Christa Simon & Stefan Wrzaczek, 2013. "Do Egalitarian Societies Boost Fertility?," Working Papers 1302, Vienna Institute of Demography (VID) of the Austrian Academy of Sciences in Vienna.

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