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Coping with Inefficiencies in a New Economic Geography Model

Listed author(s):
  • Theresa Grafeneder-Weissteiner
  • Ingrid Kubin
  • Klaus Prettner
  • Alexia Prskawetz
  • Stefan Wrzaczek

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

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Length: 26 pages
Date of creation: May 2012
Handle: RePEc:vid:wpaper:1204
Contact details of provider: Web page: http://www.oeaw.ac.at/vid/

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  10. Gustav Feichtinger & Michael Kuhn & Alexia Fürnkranz-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.
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  18. repec:hhs:iuiwop:430 is not listed on IDEAS
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