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IZA
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Integration, Agglomeration and Welfare
by
Michael P. Pflüger, Jens Suedekum
(October 2004)
published in: Journal of Urban Economics, 2008, 63 (2), 544-566
Abstract:
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.
Text: See Discussion Paper No. 1326
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