DP4715 Agglomeration and Welfare: The Core-Periphery Model in the Light of Bentham, Kaldor and Rawls

Author(s): Sylvie Charlot , Carl Gaigné , Frédéric Robert-Nicoud , Jacques-François Thisse

Publication Date: October 2004

Keyword(s): agglomeration , welfare , economic geography , compensation mechanism

JEL(s): F12 , R13

Programme Areas: International Trade and Regional Economics , Public Policy

Link to this Page: www.cepr.org/pubs/dps/DP4715.asp

The objective of this Paper is to apply different welfare approaches to the canonical model developed by Krugman, with the aim of comparing the only two possible market outcomes, i.e. agglomeration and dispersion. More precisely, we use the potential Pareto improvement criteria, as well as the utilitarian and Rawlsian welfare functions. No clear answer emerges for the following two reasons: (i) in general, there is indetermination when compensation schemes are used and (ii) the best outcome heavily depends on societal values regarding inequalities across individuals. However, simulations undertaken for plausible values of the main parameters suggest that there might be excessive agglomeration.