Working Paper: CEPR ID: DP4715
Authors: Sylvie Charlot; Carl Gaign; Frédéric Robert-Nicoud; Jacques-François Thisse
Abstract: The objective of this Paper is to apply different welfare approaches to the canonical model developed by Krugman, with the aim of comparing the only two possible market outcomes, i.e. agglomeration and dispersion. More precisely, we use the potential Pareto improvement criteria, as well as the utilitarian and Rawlsian welfare functions. No clear answer emerges for the following two reasons: (i) in general, there is indetermination when compensation schemes are used and (ii) the best outcome heavily depends on societal values regarding inequalities across individuals. However, simulations undertaken for plausible values of the main parameters suggest that there might be excessive agglomeration.
Keywords: agglomeration; compensation mechanism; economic geography; welfare
JEL Codes: F12; R13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| agglomeration (R11) | social welfare (I38) |
| dispersion (C46) | social welfare (I38) |
| low transport costs (L91) | agglomeration socially preferred to dispersion (R11) |
| benefits from agglomeration > k (R32) | agglomeration socially preferred (R11) |
| benefits from agglomeration <= k (R32) | dispersion preferred (C46) |
| agglomeration (R11) | positive externalities on core (D62) |
| agglomeration (R11) | negative externalities on periphery (D62) |