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Grafeneder-Weissteiner, T., Kubin, I., Prettner, K., Fürnkranz-Prskawetz, A., & Wrzaczek, S. (2012). Coping with Inefficiencies in a New Economic Geography Model (Working Paper No. 4). http://hdl.handle.net/20.500.12708/37388
E105-04 - Forschungsbereich Variationsrechnung, Dynamische Systeme und Operations Research E105-03 - Forschungsbereich Ökonomie
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Report No.:
Working Paper No. 4
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Date (published):
2012
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Number of Pages:
24
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Keywords:
New economic geography; constructed capital model; social planner; regional policy
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Abstract:
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 a...
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.
