3 - Market Equilibrium and Optimum Social Welfare in a Two-Region Economy

Abstract

This chapter discusses a series of neoclassical models of a two-region economy by which one can examine discrepancy between market equilibrium and the social optimum under alternative specifications of the pattern of migration and discusses policy measures to fill the discrepancy. This sort of analysis is quite relevant to an economy like present-day Japan, where the reasons for people's migration among regions are becoming more and more complicated. The chapter presents the analysis of the simplest model with no public sector goods and no region-specific factors. Even in this simplest case, some intervention by the public sector becomes necessary to make the market equilibrium equivalent to the social optimum, unless a particular pattern of rental-income distribution between the two regions exists. Market equilibrium becomes only the second best social optimum, even with some intervention, in this model. Inefficiency brought by the presence of region-specific factors is also quantitatively appraised. Controllability of the supply of own sector goods by the public sector assures the equivalence of the market equilibrium and the social optimum, but it cannot overcome the difficulty caused by the presence of uncontrollable region-specific factors.