IDEAS home Printed from
MyIDEAS: Login to save this paper or follow this series

Coping with Inefficiencies in a New Economic Geography Model

  • 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.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: no

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

in new window

Length: 26 pages
Date of creation: May 2012
Date of revision:
Handle: RePEc:vid:wpaper:1204
Contact details of provider: Web page:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Ottaviano, Gianmarco I. P. & Thisse, Jacques-Francois, 2002. "Integration, agglomeration and the political economics of factor mobility," Journal of Public Economics, Elsevier, vol. 83(3), pages 429-456, March.
  2. Gustav Feichtinger & Michael Kuhn & Alexia Prskawetz & Stefan Wrzaczek, 2011. "The Reproductive Value as Part of the Shadow Price of Population," Working Papers 1106, Vienna Institute of Demography (VID) of the Austrian Academy of Sciences in Vienna.
  3. Benassy, Jean-Pascal, 1991. "Monopolistic competition," Handbook of Mathematical Economics, in: W. Hildenbrand & H. Sonnenschein (ed.), Handbook of Mathematical Economics, edition 1, volume 4, chapter 37, pages 1997-2045 Elsevier.
  4. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
  5. CHARLOT, Sylvie & GAIGNÉ, Carl & ROBERT-NICOUD, Frédéric & THISSE, Jacques, 2003. "Agglomeration and welfare : the core-periphery model in the light of Bentham, Kaldor, and Rawls," CORE Discussion Papers 2003039, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  6. Kranich, Jan, 2009. "Agglomeration, innovation and international research mobility," Economic Modelling, Elsevier, vol. 26(5), pages 817-830, September.
  7. Pflüger, Michael P. & Suedekum, Jens, 2004. "Integration, Agglomeration and Welfare," IZA Discussion Papers 1326, Institute for the Study of Labor (IZA).
  8. Paul Krugman, 1990. "Increasing Returns and Economic Geography," NBER Working Papers 3275, National Bureau of Economic Research, Inc.
  9. Krugman, Paul R & Venables, Anthony J, 1995. "Globalization and the Inequality of Nations," The Quarterly Journal of Economics, MIT Press, vol. 110(4), pages 857-80, November.
  10. ,, 2009. "Foundations of Modern Macroeconomics Text & Manual Set," OUP Catalogue, Oxford University Press, edition 2, number 9780199564392.
  11. Judd, Kenneth L, 1985. "On the Performance of Patents," Econometrica, Econometric Society, vol. 53(3), pages 567-85, May.
  12. Baldwin, Richard E., 1999. "Agglomeration and endogenous capital," European Economic Review, Elsevier, vol. 43(2), pages 253-280, February.
  13. 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.
  14. Heijdra, Ben J., 2009. "Foundations of Modern Macroeconomics," OUP Catalogue, Oxford University Press, edition 2, number 9780199210695.
  15. Ottaviano, Gianmarco & Thisse, Jacques-François, 1998. "Agglomeration and Trade Revisited," CEPR Discussion Papers 1903, C.E.P.R. Discussion Papers.
  16. Martin, Philippe & Ottaviano, Gianmarco, 1996. "Growing Locations: Industry Location in a Model of Endogenous Growth," CEPR Discussion Papers 1523, C.E.P.R. Discussion Papers.
  17. Thomas Fent & Belinda Aparicio Diaz & Alexia Prskawetz, 2013. "Family policies in the context of low fertility and social structure," Demographic Research, Max Planck Institute for Demographic Research, Rostock, Germany, vol. 29(37), pages 963-998, November.
  18. Tabuchi, Takatoshi & Thisse, Jacques-François, 2001. "Taste Heterogeneity, Labour Mobility and Economic Geography," CEPR Discussion Papers 3114, C.E.P.R. Discussion Papers.
  19. Florin O. Bilbiie & Fabio Ghironi & Marc J. Melitz, 2008. "Monopoly Power and Endogenous Product Variety: Distortions and Remedies," NBER Working Papers 14383, National Bureau of Economic Research, Inc.
  20. Puga, Diego, 1999. "The rise and fall of regional inequalities," European Economic Review, Elsevier, vol. 43(2), pages 303-334, February.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:vid:wpaper:1204. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Frank Kolesnik)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.