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


  • Yoshitsugu Kanemoto

    (National Graduate Institute for Policy Studies)


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.

Suggested Citation

  • Yoshitsugu Kanemoto, 2011. "Second-Best Cost?Benefit Analysis with a Microfoundation of Urban Agglomeration," GRIPS Discussion Papers 11-03, National Graduate Institute for Policy Studies.
  • Handle: RePEc:ngi:dpaper:11-03

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    References listed on IDEAS

    1. Kanemoto, Yoshitsugu, 1990. "Optimal cities with indivisibility in production and interactions between firms," Journal of Urban Economics, Elsevier, vol. 27(1), pages 46-59, January.
    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. Duranton, Gilles & Puga, Diego, 2004. "Micro-foundations of urban agglomeration economies," Handbook of Regional and Urban Economics,in: J. V. Henderson & J. F. Thisse (ed.), Handbook of Regional and Urban Economics, edition 1, volume 4, chapter 48, pages 2063-2117 Elsevier.
    4. Behrens, Kristian & Kanemoto, Yoshitsugu & Murata, Yasusada, 2015. "The Henry George Theorem in a second-best world," Journal of Urban Economics, Elsevier, vol. 85(C), pages 34-51.
    5. 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. Vermeulen, Wouter, 2011. "Agglomeration externalities and urban growth controls," LSE Research Online Documents on Economics 57852, London School of Economics and Political Science, LSE Library.
    2. Wouter Vermeulen, 2011. "Agglomeration Externalities and Urban Growth Controls," CPB Discussion Paper 191, CPB Netherlands Bureau for Economic Policy Analysis.
    3. Wouter Vermeulen, 2017. "Agglomeration externalities and urban growth controls," Journal of Economic Geography, Oxford University Press, vol. 17(1), pages 59-94.

    More about this item


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

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