1. 1 Agglomeration Economies Chapter 5

2. 2 To cluster or not to cluster? a.k.a: external economies; cluster economies Agglomeration Economies: lower production costs attract clusters Diseconomies of agglomeration: very large clusters repel economic activity

3. 3 Types of Agglomeration Economies Localization Economies decrease the cost of production for every firm in a specific industry. Urbanization Economies decrease the cost of production for every firm that locates in a particular city regardless of industry.

4. 4 Benefits of clusters Clusters may increase product demand, allowing firms to benefit from internal economies of scale. Marshalian externalities from clusters: –Pools of specialized labor –Specialized firms –Technological spillovers

5. 5 Localization Economies Pools of specialized labor –Easy to poach labor from competitors –Specialized training exists –Formal/informal communication (Saxonian)

6. 6 Localization Economies Specialized resources –Backward linkages (upstream products) (supplier of inputs) –Forward linkages (downstream products) (buyer of output) –Face to face communication –JIT –Producer services (outsourcing) –Capital markets/bankers understand that industry

7. 7 Localization Economies Technological spillovers (technological externalities) –Stimulate innovation –Often created from poached labor

8. 8 Urbanization Economies Advantages connected with the size of an urban area regardless of industry. Specialized labor: –Law of large numbers: lower unemployment rate if workers are willing and able to change industries. –More special services than in rural areas.

9. 9 Urbanization Economies Specialized resources –Urban vs Rural Infrastructure –Large city projects less risky to finance Technological spillovers –Novelty by combination from great variety of goods in a city.

10. 10 Perfectly competitive firm in long-run equilibrium

11. 11 Imperfect competitor with normal profit

12. 12 Technical average cost and total average cost curves of imperfect competitor

13. 13 Appendix: Location under Uncertainty Table 5A–1. Payoff Matrix (in millions) RecessionModerate GrowthBoom Site 1604025 Site 2304560 Site 3205070 Site 4206730

14. 14 Table 5A–2. Laplace (equal probability) Payoff Matrix (in millions) RecessionModerate GrowthBoom Average payoff Site 160402541.67 Site 230456045.00 Site 320507046.67 Site 420673039.00

15. 15 Table 5A–3. Bayesian (weighted probability) Payoff Matrix (in millions) Recession (50% probability) Moderate Growth (40% probability) Boom (10% probability) Weighed payoff Site 160402548.50 Site 230456039.00 Site 320507037.00 Site 420673039.80

16. 16 Table 5A–4. Payoff Matrix (in millions) RecessionModerate GrowthBoom Site 1604025 Site 2 (Maximin)304560 Site 3 (Maximax)205070 Site 4206730

17. 17 Minimax Regret Table 5A–5. Regret Matrix (in $ millions) RecessionModerate GrowthBoom Site 102745 Site 2302210 Site 340170 Site 4400