1. Introduction
It is customary to model transport in an Interregional General Equilibrium model without
including the effects of both positive and negative externalities. In such a simplified model
focus is usually directed at the price effects of direct changes in transport costs, as the
transport system is modified.
The inclusion of negative externalities such as congestion and environmental damage can
usually be incorporated either as a pre-model extension where transport costs include impacts
from congestion or as a post-model where environmental damage is modelled as a function of
level of economic activity and a set of emission coefficients. This is normally straightforward,
as the pre- and post models are usually linked in a loosely coupled system. In such a system
by definition feedback effects from the economic model to the pre-model (from the economic
system to congestion, for example) and from the post-model to the economic model (from
environmental system to economic system, for example) are not incorporated.
The inclusion of positive externalities is a more difficult task because it usually involves
integration of the externality into consumption and production behaviour. This is because
positive externalities normally have both impacts on economic activity and are influenced by
level of economic activity.
For small and medium size firms (SMEs) this means that increasing concentration (both
number and density of firms) increases their productivity. On the other hand, increasing
productivity reduces prices, increases competitiveness and thereby export and economic
activity. These feedback mechanisms imply that modelling positive externalities involves the
application of an interregional general equilibrium model with productivity as a fully
integrated sub-model.
In the paper first a general presentation of the theory of positive externalities is made. This
is followed by an examination of the effects of transport system changes on economic
activity, through an econometric study of Danish regions. In order to illustrate the
redistributional impacts on economic activity by positive externalities, an Interregional
General Equilibrium model for Denmark is presented and results from a study using this
model of the spillover and feedback effects of positive externalities are examined.
2. Positive externalities
Agglomeration economies are positive externalities associated with the spatial concentration
of economic activity, resulting in lower marginal and average costs and increases in
productivity. These are scale economies which do not apply at the level of the individual firm,
but at the level of the industry. It is therefore possible to retain the assumption of perfect
competition whilst analysing the effects of externalities.
In the literature it is customary to distinguish between locational economies, which arise
from agglomeration of firms within the same industry and agglomeration or urban economies,
which arise when firms in different industries agglomerate in the same (urban) area.
Externalities can be best understood by examining the case of locational economies in
relation to the industry supply curve. A constant cost industry has a horizontal supply curve,
which is derived from the minimum point on the long-run average cost (LRAC) curve of
(identical) small firms in the industry. As the industry expands, new firms are added and the
supply curve remains horizontal. If, however, there are scale economies which are external to
the firm but internal to the industry, then the arrival of each additional firm will mean that the
minimum point on the LRAC curves will be lower and the industry LRAC and marginal cost
curves slope down to the right, as shown in figure 1. The supply curve of a declining cost