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

Theresa Grafeneder-Weissteiner, Ingrid Kubin, Klaus Prettner, Alexia Prskawetz, Stefan Wrzaczek

Publikation: Wissenschaftliche FachzeitschriftOriginalbeitrag in FachzeitschriftBegutachtung


This article introduces a social planner version of a central microfounded New Economic 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.
Seiten (von - bis)146 - 157
FachzeitschriftMathematical Social Sciences
PublikationsstatusVeröffentlicht - 2015