The economic prosperity of a region is largely dependent on the accumulation and diffusion of knowledge. In this paper, the scale effects as well as the resource reallocation effects of intra- and interregional knowledge transmission are analysed. Within a model, the optimal levels of knowledge diffusion are calculated. It is also shown that knowledge diffusion becomes more important if regions are more integrated in interregional goods trade. Free trade in goods can harm the development of a region if the interregional knowledge diffusion is not intensive enough.