Regional Economics + Land Rent theory part 1

Location theory

Early 1900s deals with the economic mechanism that distribute activities in space. The economic reasoning of firms and people when choosing the location. Location theory seeks to explain the distribution of activity in space, to identify the factors that influence the location of individual activities in a different territory, with a different production. Those phenomena are analyzed by removing any geographical feature that might explain the concentration. Those theory adopt the concept of space defined in terms of physical distance and transportation cost.

Economic forces and location choices

The location choices are interpreted by only considering the two economic forces:

• Agglomeration economies lead activities to concentrate
• Transportation cost diffuses activities in space

These two forces coexist and are opposite. By balancing these two forces, the models are able to account for the existence of agglomeration of economic activities even under uniform space hypothesis.

Agglomeration economies

Economies stays for saving — How to have economical advantages thanks to agglomeration of firms. There are three ways in which this happens:

1. Economies of scale - Large scale production process allows lower cost per unit of output because fixed costs are divided into more products. In order to get advantages of large scale, the firms concentrate all its plants in a single location. Advantages derive from the concentration of activity in space. Scale economy depends by the size of firms.
2. Localization economies - Economy comes from the specialization of an area, with a lot of firms of the same industry. The advantages are due to the fact that the area is specialized with skilled labour force and specialized suppliers. Localization economies are determined by the size of the sector.
3. Urbanization economies - Advantages from being located in an urban area. This derives from a high density and variety of products and services available in an area. Presence of a large scale fixed social capital (transport infrastructures, telecommunications systems). The advantages increase with the size of the city, a larger city produces a higher level, quality, and quantity of services.

These three ways push into concentration of economic activities in space. If these were the only forces, we would live in a big city. There are other two forces that push in the opposite way giving rise to dispersed location.

1. Formation in the agglomeration area of increasing costs or diseconomies

Price: increasing cost due to scarcity (land and labor). Congestion cost = cost of demand in the use of that service, e.g., hospital, noise, pollution. Also in terms of opportunity cost.

Location Theory Early 1900s deals with the economic mechanism that distribute activities in space. The economic reasoning of firms and people when choosing the location. Location theory seeks to explain the distribution of activity in space, to identify the factors that influence the location of individual activities, in a different territory, with different production. Those phenomena are analyzed by removing any geographical feature that might explain the concentration. Those theory adopt the concept of space definable in terms of physical distance and transportation cost.

The location choices are interpreted by only considering the two economic forces:

• Agglomeration economies lead activities to concentrate
• Transportation cost diffuses activities in space

Those two forces coexist and are opposite. Balancing these two forces, the models are able to account for the existence of agglomeration of economic activity even under uniform space hypotheses.

Agglomeration economies

Economies stays for saving - How to have economical advantages thanks to agglomeration of firms. There are three ways in which this happens:

1. Economies of scale - Large scale production process allows lower cost per unit of output because fixed costs are divided into more products. In order to get advantages of large scale, the firms concentrate all its plants in a single location. Advantages derive from the concentration of activity in space. Scale economy depends by the size of firms.
2. Localization economies - Economy comes from the specialization of an area, with a lot of firms of the same industry. The advantages are due to the fact that the area is specialized with skilled labour force and specialized suppliers. Localization economies are determined by the size of the sector.
3. Urbanization economies - Advantages from being located in an urban area. This derives from a high density and variety of products and services available in an area. Presence of a large scale fixed social capital (transport infrastructures, telecommunication systems). The advantages increase with the size of the city, a larger city produces a higher level, quantity, and quality of services.

Those three ways push into concentration of economic activities in space. If those were the only forces, we would live in a big city. There are other two forces that push in the opposite way and give rise to dispersed location.

1. Formation in the agglomeration area of increasing costs or diseconomies