Edited by Bernard Fingleton
Chapter 6: Sinking the Iceberg? On the Treatment of Transport Costs in New Economic Geography
Bernard Fingleton and Philip McCann 6.1 INTRODUCTION Recent developments in new economic geography have incorporated all issues related to transportation and transport costs by using Krugman’s adaptation of Samuelson’s original iceberg function. The proponents of these models argue that this allows them to develop models of spatial allocation and growth without any need to model transport costs or transport-related issues, the actual details of which they regard as being unimportant in determining the spatial allocation of resources of growth. In these new economic geography models, geography and space is introduced into new economic geography models in the form of an iceberg transport-costs function, in which part of the goods to be delivered are consumed by the very act of transporting. In new international trade models (Helpman and Krugman, 1985; Krugman, 1990) and in the earliest forms of new economic geography models (Krugman, 1991a, 1991b) trade costs and transport costs were synomymous and aspatial, in that distance was not explicitly modelled. Rather, all such costs were incorporated within Samuelson’s iceberg model. Greater distances simply imply larger values for the inverse iceberg formula. The major reason for the use of this formulation is that it allows for a direct mathematical manipulation of trade-costs functions in a manner that is consistent with the modelling techniques allowed for by Dixit-Stiglitz (1977) functions of monopolistic competition. This is because the iceberg function yields log-linear transport costs, and when this is added to the loglinear demand functions yielded by CES preferences, only the levels, and not...
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