Modelling Transport in an Interregional General Equilibrium Model with Externalities



industry becomes the LRAC curve rather than the marginal cost curve, as when price equals
marginal cost, firms will make a loss. A further consequence is that an increase in demand
(from D to D1 ) for this type of industry will result in both lower prices and increased output,
as shown in figure 1. This is a prime reason for policymakers’ interest in external scale
economies. The theory of economies of agglomeration builds upon the assumption that spatial
proximity magnifies these effects and in many cases is a condition for their operation.

Figure 1

Industry supply curves for a constant cost industry (S1) and a declining cost industry
(S2)

(industry)

Marshall’s (1890) writings represent a first attempt to examine the concept of economies of
agglomeration, identifying four types of advantage. His original formulation includes the
advantages of a thick market for specialised skills in the labour force, the development of
specialized firms with backward and forward linkages associated with large markets (Fujita,
Krugman & Venables, 1999) and the existence of ancillary trades. The fourth factor,
‘mysteries of the trade... in the air’ , relates to what now can be termed spillover effects,
which are dynamic external economies.

The labour market advantage arises mainly because of efficiency gains from a pooled
labour market (Krugman 1991). The linkage gains are straightforward, resting partly on
assumptions of scale economies in supplying firms (which are pecuniary external economies),
as well as transport cost savings.

A distinction can be made between pecuniary and technological externalities Scitovsky
(1952). A pecuniary externality (which can be either positive or negative) affects the price of
inputs as the size of an industry grows. If supplying firms enjoy scale economies as the
industry grows, unit costs of the production of inputs will fall. Economic theory tends not to
regard this as a market distorting externality, as the benefit is generally available to
competitive firms. However, pecuniary externalities may be distortionary as they frequently



More intriguing information

1. Tariff Escalation and Invasive Species Risk
2. Effects of a Sport Education Intervention on Students’ Motivational Responses in Physical Education
3. Prevalence of exclusive breastfeeding and its determinants in first 6 months of life: A prospective study
4. Estimation of marginal abatement costs for undesirable outputs in India's power generation sector: An output distance function approach.
5. Spectral density bandwith choice and prewightening in the estimation of heteroskadasticity and autocorrelation consistent covariance matrices in panel data models
6. The name is absent
7. The name is absent
8. Innovation Policy and the Economy, Volume 11
9. AMINO ACIDS SEQUENCE ANALYSIS ON COLLAGEN
10. IMPLICATIONS OF CHANGING AID PROGRAMS TO U.S. AGRICULTURE
11. Menarchial Age of Secondary School Girls in Urban and Rural Areas of Rivers State, Nigeria
12. The name is absent
13. Unemployment in an Interdependent World
14. Conditions for learning: partnerships for engaging secondary pupils with contemporary art.
15. TLRP: academic challenges for moral purposes
16. The name is absent
17. Constrained School Choice
18. ENVIRONMENTAL POLICY: THE LEGISLATIVE AND REGULATORY AGENDA
19. A methodological approach in order to support decision-makers when defining Mobility and Transportation Politics
20. Top-Down Mass Analysis of Protein Tyrosine Nitration: Comparison of Electron Capture Dissociation with “Slow-Heating” Tandem Mass Spectrometry Methods