Industrial Agglomeration with Urban Congestion Costs

Abstract

This paper incorporates urban congestion costs (an externality) in the production sector of Krugman's model (1991) to examine the impact of congestion costs on the choice of a firm's locations and its effect on industrial agglomeration. We show that the equilibrium regional configuration is dependent on the effects of the agglomeration force as well as the dispersion force, and the dispersion force in this model involves the congestion costs of firms and the transport costs associated with manufacturing goods. We highlight the negative externality of agglomeration in the firm’s production and find that complete dispersion arises when transport cost is low. However, when the transport costs increase and are large enough, the congestion cost effect is insignificant and dominated by the transport costs effect, and the outcome will converge to Krugman's results. This finding confirms Tabuchi's (1998) result by considering land consumption (i.e., congestion costs) in the household sector.