Coping with Inefficiencies in a New Economic Geography Model
Ingrid Kubin (),
Klaus Prettner (),
Alexia Fürnkranz-Prskawetz and
No 1204, VID Working Papers from Vienna Institute of Demography (VID) of the Austrian Academy of Sciences in Vienna
This article introduces a social planner version of a model central to the New Economic Geography for explicitly answering whether the symmetric equilibrium outcome of the decentralized market economy is socially desirable. We find that savings incentives are too weak, resulting in an inefficiently low capital stock and therefore an inadequate number of product varieties. The optimal subsidy and taxation scheme to remedy these distortions resulting from the monopolistic competition structure is shown to be a sales subsidy financed by a lump-sum tax that results in marginal cost pricing. Interestingly, implementing this optimal policy might actually destroy the stability of the symmetric equilibrium and result in unintended agglomeration processes.
Keywords: New Economic Geography; Constructed Capital Model; Social Planner; Regional Policy; Agglomeration (search for similar items in EconPapers)
Pages: 26 pages
New Economics Papers: this item is included in nep-geo and nep-ure
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3) Track citations by RSS feed
Downloads: (external link)
http://www.oeaw.ac.at/fileadmin/subsites/Institute ... Papers/WP2012_04.pdf
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:vid:wpaper:1204
Access Statistics for this paper
More papers in VID Working Papers from Vienna Institute of Demography (VID) of the Austrian Academy of Sciences in Vienna
Bibliographic data for series maintained by Frank Kolesnik ( this e-mail address is bad, please contact ).