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Integration, Agglomeration and Welfare

  • Michael Pflüger

    ()

    (Department of Economics, Technical University of Darmstadt)

  • Jens Südekum

    ()

    (Department of Economics, University of Konstanz)

This paper studies the social desirability of agglomeration and the efficiency arguments for policy intervention in a simple, analytically solvable ‘new economic geography’ model with two trade integrating regions. The location pattern emerging as market equilibrium is “bubble-shapedâ€, i.e. it features dispersion of firms both at high and low trade costs and stable equilibria with partial agglomeration of firms in addition to core-periphery equilibria for intermediate levels of trade costs. Our central finding is that the market equilibrium is characterised by over-agglomeration for high trade costs and under-agglomeration for low trade costs. For very high and very low levels of trade costs as well as for an intermediate range of trade costs, the market equilibrium yields the socially optimal degree of agglomeration. An important implication of this result is that, on efficiency grounds, regional policy should foster the dispersion of firms for a range of high trade costs only, but agglomeration for a range of low trade costs. Hence, regional policies, such as those pursued by the European Union which are aimed at fostering dispersion in general, are counterproductive when trade integration is deep enough.

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Paper provided by Research Group Heterogeneous Labor, University of Konstanz/ZEW Mannheim in its series Working Papers of the Research Group Heterogenous Labor with number 04-24.

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Length: 28 pages
Date of creation: 23 Dec 2004
Date of revision:
Handle: RePEc:knz:hetero:0424
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  1. Paul Krugman, 1990. "Increasing Returns and Economic Geography," NBER Working Papers 3275, National Bureau of Economic Research, Inc.
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  16. 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.
  17. Martin, Philippe, 1999. "Public policies, regional inequalities and growth," Journal of Public Economics, Elsevier, vol. 73(1), pages 85-105, July.
  18. Philippe Martin, 1999. "Are European regional policies delivering?," Sciences Po publications info:hdl:2441/9343, Sciences Po.
  19. Michele Boldrin & Fabio Canova, 2001. "Inequality and convergence in Europe's regions: reconsidering European regional policies," Economic Policy, CEPR;CES;MSH, vol. 16(32), pages 205-253, 04.
  20. Karen Helene Midelfart-Knarvik & Henry G. Overman, 2002. "Delocation and European integration: is structural spending justified?," Economic Policy, CEPR;CES;MSH, vol. 17(35), pages 321-359, October.
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