An Introduction to Regional Economics

What is Regional Economics

• Supplies a framework within which the spatial character of economic systems may be understood– Highlights the role of space in the analysis of

economic activity– Provides a spatial component to the study of

how agents respond to socio-economic changes

What is where, why and so what?

• What: Refers to the quantity and type of activity

• Where: Refers to location relative to other economic activity or socio-economic entities

The why and the so what refer to interpretations within the somewhat elastic limits of the economist's competence and daring.

• Why: Is the million dollar question, in that it seeks to understand the underlying factors that determine the distribution of economic activity

• So what: It is of significant concern for policy. What desirable and undesirable consequences come with the presence or absence of economic activity

The Role of Space in the Past

• Traditional economists omitted space from the analysis altogether

• Geographers omitted the behavioral aspect and answered only what is where

• Policy analysts and urban planners focused on the somewhat obvious “so what”

The three foundation stones

• Imperfect factor mobility– Refers to natural advantages

• Imperfect divisibility– Economies of Scale and Size

• Imperfect mobility of goods and services– Local goods and transportation costs

Natural Resources

• Imperfect mobility of resources contributes patterns of comparative advantage that drive specialization and trade– Wine & Movies – weather – Mills—Rivers– Commerce—Ports …etc.

• Do natural resources explain all economic activity?– Consider

• The Twin Cities• New Orleans

Economies of Spatial Concentration

• Can be traced to imperfect divisibility of inputs– Economies of scale– More efficient to do business in areas with high concentration of

economic activity

• Christaller-Losch exercises– Remove location advantage from consideration and derive

location patterns of firms constrained by:• Economies of spatial concentration• Transport costs• Hotelling’s exercise• Expected full concentration, uniform dispersion or no pattern at all—random

location.• Found Crystal-like patterns instead

Imperfect Mobility of goods and services

• Costly to transport goods to markets

• Some services are deliverable only locally– Haircuts & emergency services

• Firms may have an advantage to being far from competition

Overall Considerations

• Location decision of individual entities– Location attributes are taken as given while

entities choose optimally

• Space as a cost and asset– Transport costs– Input– Amenity

• Forces that favor dispersion and concentration of economic activity

Individual Location decisions• Unit of location can be a firm, plant household institution…etc.

• Firm locations are motivated by profit– Long term profit, take into account costs and revenues associated with

a particular location

• Public establishments will also consider revenues/benefits and costs.– When there are no direct revenues there are considerations like:

• Value to the public • Number of voters

• Households make location decision based on:– Direct costs– Private public and natural amenities

• In essence each entity will maximize net benefits by choosing location optimally

Inputs and Output in Space--Firms

• Local inputs are non transferable—can only be used on site

• Transferred inputs incur transportation costs

• Local demand refers to sales of output at the location in question

• Outside demand refers to sales of transferable outputs reflecting costs associated with distance

Relative Importance of Location Attributes

• Inquiry to answer this question has included surveying decision makers– BR&E like surveys ask decision makers to rate the importance of

several location attributes– Incentives to not tell the truth– Makes quantitative tradeoffs difficult– “Behavioral” issues: people don’t really know the answer and

produce the reason that seems most likely

• Direct measures of costs and benefits– Need to know the production technology for firms– Need accurate measures of price variability across locations– For taxes it is difficult to know the benefit that firms receive from

the public goods available– Difficulties in quantifying costs per unit of input when input

productivity is difficult to measure– Complications with market power and economies of size

Households and other institutions

• Relative importance of attributes for households– Direct inquiry – Observed behavior

• How do governments decide what services to locate where?– Measuring benefits of public projects

• Direct inquiry (Contingent Valuation)• “Travel Cost”• Hedonic models

• Others are more difficult– Nursing homes & religious institutions

Possible Patterns of Differential Advantage

• Uniform (ubiquity)– Utilities, climate (within areas) etc on the supply side.– Commodities are examples of uniform access to

markets on the demand side

• Advantage related to size of location—Usually due to economies of size and local inputs or demand.

• Non systematic (public goods, labor supply, etc.)

Putting This in Perspective• The why and the so what refer to interpretations

within the somewhat elastic limits of the economist's competence and daring

• Competence:– Utility and Consumer theory, Behavioral

Economics etc.– Firm/Location theory & Direct Inquiry

• Daring– Positive vs. Normative?– How much “paternalism”?

A model of Transfer Orientation

• Location is primarily determined by supply or /demand for transferable inputs/outputs

• Assumptions:– Firm is a price taker at several spatially separated

input and output markets– Firm pays for the cost of transporting inputs and

output– Transport costs increase with distance– Processing costs do not change with location size or

size of operation. (no externalities, and a constant returns to scale technology)

A model of Transfer Orientation

• Wm tons of material produce Wq tons of output

• Materials and output are transported at rm and rq per ton-mile.

• Firm compares Wmrm to Wqrq (Ideal weights)

• Will locate either at S or M.• Once we determine if the firm is input or

output oriented the task of choosing a location becomes simpler

Input/output OrientationProcess Characteristic Orientation Examples*

Physical weight loss Input Smelters; ore beneficiation; dehydration

Physical weight gain Output Soft-drink bottling; manufacture of cement blocks

Bulk loss Input Compressing cotton into high-density bales

Bulk gain Output Assembling automobiles; manufacturing containers; sheet-metal work

Perishability loss Input Canning and preserving food

Perishability gain Output Newspaper and job printing; baking bread and pastry

Fragility loss Input Packing goods for shipment

Fragility gain Output Coking of coal

Hazard loss Input Deodorizing captured skunks; encoding secret intelligence; microfilming records

Hazard gain Output Manufacturing explosives or other dangerous compounds; distilling moonshine whiskey

Several Inputs• Consider a technology that produces one ton of

output for x tons of one input and y tones of another

• Best location will be inside the triangle joining the sources of inputs and the market

• Three ‘Ideal Weights’ each pulling towards one corner

• Best point is no longer guaranteed to be at one of the corner points

• It is guaranteed to be at a corner point if one of the weights is predominant (larger then the sum of the other two)

• Best location may still be at a corner if there is no predominant weight