Coping with inefficiencies in a New Economic Geography model: The unintended consequences of policy interventions

Author(s)
Theresa Grafeneder-Weissteiner, Ingrid Kubin, Klaus Prettner, Alexia Prskawetz, Stefan Wrzaczek
Abstract

This article introduces a social planner version of a central microfoundedNewEconomic Geography model
for explicitly answering whether the symmetric equilibrium 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. We derive the appropriate subsidy and
taxation scheme to remedy these distortions. Interestingly, implementing the associated policies crucially
impacts on the stability of the symmetric equilibrium and has the potential to result in unintended
agglomeration processes

Organisation(s)
Department of Economics, Department of Business Administration
External organisation(s)
Wirtschaftsuniversität Wien (WU), Technische Universität Wien, Österreichische Akademie der Wissenschaften (ÖAW)
Journal
Mathematical Social Sciences
Volume
76
Pages
146-157
No. of pages
11
ISSN
0165-4896
DOI
https://doi.org/10.1016/j.mathsocsci.2015.05.003
Publication date
07-2015
Peer reviewed
Yes
Austrian Fields of Science 2012
Economic theory
Portal url
https://ucris.univie.ac.at/portal/en/publications/coping-with-inefficiencies-in-a-new-economic-geography-model-the-unintended-consequences-of-policy-interventions(e6789b35-2e1c-4113-8363-b78b8399b1b7).html