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Edited by André de Palma, Robin Lindsey, Emile Quinet and Roger Vickerman
Chapter 6: City Formation and Transport Costs
Takatoshi Tabuchi INTRODUCTION Most economic activities take place in cities, which are characterized by spatial externalities and heterogeneity. Apparently, they do not satisfy the postulates of the traditional economic theory, particularly general equilibrium theory under perfect competition. In fact, the presence of numerous large cities worldwide suggests that we need to reconsider the applications of traditional economic theory to urban economies, such as the agglomeration of firms and households. There is no doubt that political power exerts a strong influence on agglomeration. According to Bairoch (1988), the population of Rome amounted to one million during the second century, while it fell to below 20 000 in the fourteenth century. Apart from the political and historical factors, the main factors pertaining to city formation are heterogeneity of space and externalities in space. Heterogeneity of space is the rule in the real world. We often observe that cities are located at key junctions of trade routes such as harbors. This is Cronon’s (1991) first nature (original, prehuman nature). Other things being equal, firms are attracted to locationally advantageous regions even though the advantages are but slight. The small concentration of firms would enable regions to finance social overhead capital, which is Cronon’s (1991) second nature (artificial nature that people erect atop first nature). This would in turn reinforce the concentration of firms further. Moreover, they are bound to the location because of agglomeration economies under costly trade. This is the so-called lock-in effect. Heterogeneity of space is also found in the interregional/international...
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