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Industry location and welfare when transport costs are endogenous

Author

Listed:
  • Kristian Behrens

    (Université de Québec, ULaval - Université Laval [Québec], CORE, Center for Operations Research and Econometrics - Uni.lu - Université du Luxembourg)

  • Carl Gaigné

    (SMART-LERECO - Structures et Marché Agricoles, Ressources et Territoires - INRA - Institut National de la Recherche Agronomique - AGROCAMPUS OUEST - Institut Agro - Institut national d'enseignement supérieur pour l'agriculture, l'alimentation et l'environnement)

  • Jacques-François Thisse

    (CORE, Center for Operations Research and Econometrics - Uni.lu - Université du Luxembourg, PSE - Paris School of Economics - ENPC - École des Ponts ParisTech - ENS Paris - École normale supérieure - Paris - PSL - Université Paris sciences et lettres - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique - EHESS - École des hautes études en sciences sociales - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, Centre for Economic Policy Research)

Abstract

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.

Suggested Citation

  • Kristian Behrens & Carl Gaigné & Jacques-François Thisse, 2009. "Industry location and welfare when transport costs are endogenous," PSE-Ecole d'économie de Paris (Postprint) hal-02663616, HAL.
  • Handle: RePEc:hal:pseptp:hal-02663616
    DOI: 10.1016/j.jue.2008.11.003
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