SPATIAL ECONOMICS.- PALGRAVE By Gilles Duranton

  1. spatial economics covers location theory, spatial competition, and regional and urban economics.
  2. spatial economics is concerned with the allocation of (scarce) resources over space and the location of economic activity
  3. it is possible to develop a framework for spatial economics that builds only on local productivity differences. This approach was pioneered by Ricardo (1821), who developed a theory of land use based on relative fertility
  4. Instead, spatial economics has focused on the existence of non-convexities in the presence of transport costs. A key reason for this focus is that, although comparative advantage constitutes an appealing explanation for understanding trade flows at the world level, it provides at best a partial explanation for the location patterns of industries within countries, and it is at pains to explain major concentrations of population in large metropolitan areas. Instead, non-convexities in production or consumption seem to hold more promise for providing convincing answers to the core questions of spatial economics
  5. Hotelling (1929) assumes evenly distributed consumers over a finite segment, each consuming one unit of a homogenous good. The market is served by two firms that need to choose a location and each customer patronizes the firm that minimizes the sum of the ‘mill’ price and shipping costs. At a first stage, firms choose a location and then compete in price. The resolution of this trade-off depends on the fine details of the assumptions being made (and particularly how an increase in the distance affects the price setting power of producers)
  6. To understand central business districts or, more generally, why economic activity agglomerates, spatial economics had to provide microeconomic foundations for (local) increasing returns.
  7. Following Marshall, local increasing returns could arise because of knowledge spillovers, linkages between input suppliers and final producers, and thick local labour market interactions.
  8. Three main mechanisms can be used to generate local increasing returns: sharing, matching, and learning. Sharing mechanisms show how small non-convexities like small fixed costs paid by heterogeneous producers can be spread across larger quantities as market size increases and thus yield aggregate increasing returns. Matching mechanisms explore how larger markets might improve the probability and quality of matching. Finally, learning mechanisms explore the benefits of local size for the creation and diffusion of knowledge.
  9. To model spatial economies, two main approaches came to dominate the intellectual landscape. The first follows the work of Henderson (1974) and is know as the ‘urban systems’ approach. In this type of framework, cities arise endogenously as the result of a trade-off between agglomeration economies and urban crowding.
  10. the new economic geography, Krugman (1991), is the second main general equilibrium approach in spatial economics. This approach puts trade costs (rather than commuting costs in urban systems) at the heart of the agglomeration–dispersion trade-off.

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