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Industry location and welfare when transport costs are endogenous

  • Behrens, Kristian
  • Gaigné, Carl
  • Thisse, Jacques-François

Although transport costs are a key-ingredient of New Economic Geography, the transport sector is usually abstracted away from the analysis. Put differently, freight rates are taken as parametric and are not set by the market. This paper studies the relationships between transport costs, industry location, and welfare when freight rates are set by profit-maximizing carriers. We show that the demand for transport services becomes less elastic as the degree of spatial agglomeration rises, which increases carriers' market power and allows them to charge higher markups. Once it is recognized that firms and consumers are free to relocate in response to changes in transport costs, an increasing number of carriers, falling fixed or marginal costs in transportation, or both, trigger a gradual agglomeration of industry. In the long run, this leads to consumer welfare losses (and to aggregate welfare losses under free entry), with more inequality across agents living in different regions.

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Article provided by Elsevier in its journal Journal of Urban Economics.

Volume (Year): 65 (2009)
Issue (Month): 2 (March)
Pages: 195-208

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Handle: RePEc:eee:juecon:v:65:y:2009:i:2:p:195-208
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622905

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  1. Behrens, Kristian & Gaigne, Carl & Ottaviano, Gianmarco I.P. & Thisse, Jacques-Francois, 2006. "How density economies in international transportation link the internal geography of trading partners," Journal of Urban Economics, Elsevier, vol. 60(2), pages 248-263, September.
  2. Ottaviano, Gianmarco & Thisse, Jacques-François, 1999. "Integration, Agglomeration and the Political Economics of Factor Mobility," CEPR Discussion Papers 2185, C.E.P.R. Discussion Papers.
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  13. Blair, Roger D & Kaserman, David L & McClave, James T, 1986. "Motor Carrier Deregulation: The Florida Experiment," The Review of Economics and Statistics, MIT Press, vol. 68(1), pages 159-64, February.
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  17. Picard, Pierre M. & Zeng, Dao-Zhi, 2005. "Agricultural sector and industrial agglomeration," Journal of Development Economics, Elsevier, vol. 77(1), pages 75-106, June.
  18. Ying, John S, 1990. "The Inefficiency of Regulating a Competitive Industry: Productivity Gains in Trucking Following Reform," The Review of Economics and Statistics, MIT Press, vol. 72(2), pages 191-201, May.
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