published in: Journal of Urban Economics, 2008, 63 (2), 544-566
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 “bubbleshaped”,
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.
We use cookies to provide you with an optimal website experience. This includes cookies that are necessary for the operation of the site as well as cookies that are only used for anonymous statistical purposes, for comfort settings or to display personalized content. You can decide for yourself which categories you want to allow. Please note that based on your settings, you may not be able to use all of the site's functions.
Cookie settings
These necessary cookies are required to activate the core functionality of the website. An opt-out from these technologies is not available.
In order to further improve our offer and our website, we collect anonymous data for statistics and analyses. With the help of these cookies we can, for example, determine the number of visitors and the effect of certain pages on our website and optimize our content.