8 - Agglomeration Economies & Externalities

Question 1

Some facts about Agglomeration - how is the distribution

Answer 1

• spatial distributon of population and economic activities extremely unequal
• income & GDP are concentrated in a small number of countries
  -> agglomerations are pervasive!

Question 2

how about the spatial distribution within the countries?

Answer 2

we have large metropolises (Paris) as well as specialised cities or regions (Silicon Valley)

Question 3

internal structure of cities

Answer 3

Agglomeration at smaller scales, e.g. commercial districts as shops & restaurants cluster in neighborhoods or a single street

or shopping mall

Question 4

reasons for the existence of cities

Answer 4

• supply of public services
• a city exhibits increasing returns to scale
• large number of people faciliates the mutual provision of collective services (public transp., health care services, ..)

Question 5

Evidence for the increasing returns to scale?

Answer 5

studies have shown that doubling a city size more than double the output

correlation of wages and density of economic activities is impressive!!

Question 6

4 Reasons for Agglomeration

but not too important as its not economic relevant

reasons to cluster together

Answer 6

1) sociological -> you like to interact with people
2) psychological -> afraid of being alone
3) historicals -> your grandfather already lived where you live now
4) cultural -> incomparable atmosphere

Question 7

why arelarger (denser) cities more productive & have higher wage rates?

Answer 7

1) increasing returns to scale
2) external economies (positive externalities)

Question 8

what would happen in case of constant return?

Answer 8

so alrge group of firms in the same place -> high demand for land and labor -> increasing costs -> reducing profitability
–> Cluster will probably disappear

Question 9

what would happen in case of increasing returns?

Answer 9

increasing efficiency will compensate the increased prices
-> attracting even more firms -> implying more growth and investment
–> cumulative local growth process

Question 10

Internal EOS

Answer 10

reducing average costs by increasing production volume

Question 11

External EOS

Answer 11

Agglomeration effects arising from the geographic concentration of companies

can apply to a sector or the whole economy

Question 12

What does “Externalities” involve?
why do they arise?

Answer 12

known as neighborhood effects, involving interdependece of utility, production or profit funtions.
they arise bc of the non-existence of markets (technological) or market interdependence (pecuniary/monetary)

Question 13

define technological externalities

what is the classic example?

how do they often appear?

Answer 13

when the production possibilities of a firm are directly affected by the action of another agent in the economy

classic example: fishery & oil refinery

they often appear as benefits due to KS

Question 14

Pecuniary Externalities

Answer 14

affects firm’s demand & profit functions through changes in (input & output) prices

Question 15

According Alfred Marshall: which 4 sectors are stimulated by external economies

Answer 15

1) geographical concentration of economic activity
2) thick markets for specialized labor
3) Knowledge and technology spillovers
4) emerge of subsidiary trades (Nebengeschäfte)

Question 16

What are Marshall Externalities?

Answer 16

same as Localization Economies, arising from silimar firms/industries operating within a certain geographic area

Question 17

What are Jacobs Externalities?

Answer 17

same as Urbanization Economies, so the benefits to economic growth of a sector fro the activities of other sectors within a city

Question 18

Agglomeration effects on Production vs. Agglomeration effects on Consumption

Answer 18

Production side: emphasis on the EOS
consumption side: EOS in the provision of local public goods, amenities, access to a greater variety of goods, ..

Question 19

what are the limits to such effects?

Answer 19

1) Congestion in Production and Consumption
2) Size Costs

production: when firms use common inputs in short supply
consumption: queues, rationing, waiting lists. with regard to traffic its bc the vehicle users dont pay for its marginal contribution

Question 20

what are the disadvantages of a city’s big size?

Answer 20

• increasing rents
• increasing commuting costs
• increasing crime, noise and pollution

Question 21

define monopolistic competition

Answer 21

large number of firms producing similiar but NOT identical products

the Introduction of product differentiation as an element of monopoly power

Question 22

why monopolistic competition important for urban (patial) economies?

Answer 22

Producers & consumers have specialized demands and the wide variety of Services creats a demand for almost infinite Numbers of different specialities

Question 23

“Love of Variety”

Answer 23

One hundred units of a single service is not of the same value as one unit from each of 100 services

larger city will have agreater variety of production inputs

as labor services are seen as production inputs