Agglomeration economies are positive externalities that induce the spatial concentration of economic activity, and these externalities can be affected by trade. Urban economic theory posits that firms obtain productive advantages from locating in close proximity to other firms and these benefits can explain the formation and growth of cities and industrial locations. The main sources of agglomera- tion externalities arise from improved opportunities for labor market pooling, knowledge interactions, specialization, the sharing of inputs and outputs, and from the existence of public goods (Chua 1993, Vay ́a et al. 2004). Myrdal (1957) talks about “Circular Causation” or “Positive Feedback” (Arthur 1989), where manufactures tend to locate around a large market, while the market also grows where manufactures production is concentrated. As the scale and density of urban and industrial agglom- erations grows, an increase in the external benefits available to firms is also expected to be found Graham (2006). However, these benefits are expected to be balanced by the increase in congestion costs, increase land rent and higher wage rates (Krugman 1991).
New Economic Geography (NEG) theory posits that cities arise because the location of economic activity is influenced by market size, transportation cost, and economies of scale (Krugman & Lizas- Elizondo 1996). Krugman (1991) develops a two-region economy where there is tension between agglomeration (or the “centripetal” force) arising from economies of scale plus transport costs, while pressures for dispersion (or the “centrifugal” force) arises from the transport costs to dispersed immo- bile farmers. He argues that manufacturing firms will try to locate themselves in or near a region with large demand for their products, but that city size will be limited by congestion costs.
In a later paper, Krugman & Lizas-Elizondo (1996) replace the market demand from immobile, dispersed farmers by land rent as the source of centrifugal force. They show that in this case, increased trade can lead to dispersion of economic activity. The intuition is that as a new market arises from trade, the pull of the existent domestic market diminishes. The domestic center loses the consumers who can now consume from abroad. They apply this model to Mexico, and show that Mexico City has lost relevance as a determinant of regional economic growth over time. Further, Krugman & Lizas- Elizondo predict that the removal of trade barriers will primarily benefit for those regions close to the new market, in our case, those regions closer to the U.S. border.
Agglomeration economies are positive externalities that induce the spatial concentration of economic activity, and these externalities can be affected by trade. Urban economic theory posits that firms obtain productive advantages from locating in close proximity to other firms and these benefits can explain the formation and growth of cities and industrial locations. The main sources of agglomera- tion externalities arise from improved opportunities for labor market pooling, knowledge interactions, specialization, the sharing of inputs and outputs, and from the existence of public goods (Chua 1993, Vay ́a et al. 2004). Myrdal (1957) talks about “Circular Causation” or “Positive Feedback” (Arthur 1989), where manufactures tend to locate around a large market, while the market also grows where manufactures production is concentrated. As the scale and density of urban and industrial agglom- erations grows, an increase in the external benefits available to firms is also expected to be found Graham (2006). However, these benefits are expected to be balanced by the increase in congestion costs, increase land rent and higher wage rates (Krugman 1991).New Economic Geography (NEG) theory posits that cities arise because the location of economic activity is influenced by market size, transportation cost, and economies of scale (Krugman & Lizas- Elizondo 1996). Krugman (1991) develops a two-region economy where there is tension between agglomeration (or the “centripetal” force) arising from economies of scale plus transport costs, while pressures for dispersion (or the “centrifugal” force) arises from the transport costs to dispersed immo- bile farmers. He argues that manufacturing firms will try to locate themselves in or near a region with large demand for their products, but that city size will be limited by congestion costs.In a later paper, Krugman & Lizas-Elizondo (1996) replace the market demand from immobile, dispersed farmers by land rent as the source of centrifugal force. They show that in this case, increased trade can lead to dispersion of economic activity. The intuition is that as a new market arises from trade, the pull of the existent domestic market diminishes. The domestic center loses the consumers who can now consume from abroad. They apply this model to Mexico, and show that Mexico City has lost relevance as a determinant of regional economic growth over time. Further, Krugman & Lizas- Elizondo predict that the removal of trade barriers will primarily benefit for those regions close to the new market, in our case, those regions closer to the U.S. border.
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