Analysis of Economic Theories Related to Urban Agglomeration

Urbanization became an important issue of China as China keeps growing rapidly and deepening industrialization - Analysis of Economic Theories Related to Urban Agglomeration introduction. Chinese government has promoted urbanization to benefit from agglomeration economies. And urbanization tendency is expected to continue. Generally, agglomeration economies in China are considered to play a positive role in recent rapid growth, but adverse reaction must be followed. Theories about agglomeration economies and diseconomies arising from urbanization are described as follows.

Agglomeration economies are defined as the external economies or diseconomies arising from the concentration of firms or industries in a particular region. Agglomeration economies are usually measured by cost reductions or productivity increases of the firms of industries in an agglomerated region. When data for production cost or output are unavailable, these measures are sometimes replaced by changes in the level of employment or in the rates of employment growth. The original idea of agglomeration economies is introduced by Alfred Marshall, although he did not use the exactly same term.

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He argued that businesses gather around a locality because there are following advantages to operating amongst businesses: benefits arising from the diffusion of trade secrets, exchanges of new ideas, the accessibility of supplying firms and new inventions and developments in machinery, in the structure of organizations and in working process. There are two kinds of agglomeration economies. One is economies of localization, which arises from relations of firms operating in the same field in the locality.

The other is economies of urbanization obtained from the variety and diversity, rather than specialization, of geographically neighboring industries. There is a consensus to some extent in literatures about sources of agglomeration economies. Sources can be classified into some major factors: the economies of scale in the supply of inputs, highly efficient local labor market, effects of rich information and knowledge and improvement in the quality of infrastructure such as communication, electricity, and water supply.

Finally, there is the role of increased local competition, but opinions and empirical evidences are divided on this. One school claims less competition is beneficial to growth because it enables firms to intensify their knowledge spillover for better internalization, which in turn brings about innovation. The other schools followed the traditional argument that more competition promotes innovation and growth. Until now, only agglomeration economies were discussed in this paper. This does not mean that agglomeration economies are always positive.

As concentration in a limited region increases beyond a certain point, agglomeration diseconomies begin and lead to a rise in cost. Typical examples include air pollution and traffic congestion. A cost of air pollution can be measured with a simple equation. PCi is a social cost by a pollutant, i, and EFi is an emission factor, which equals to the quantity of i when 1 unit of energy is consumed. A social marginal cost, AC, is defined as follows. AC= iPCi?EFi Costs of traffic congestion can be measured as follows.

The following graph shows how traffic congestion causes diseconomies. D represents a marginal utility curve which shows how much utility a person obtain at a certain level of traffic. P indicates a private marginal cost which is directly charged to the individual who uses the road. S indicates the social marginal cost that society bears and it is a sum of private costs and externalities arising from traffic congestion. Optimal traffic is Y where a social marginal cost and utility meet.

But, when people decide to drive cars, they only consider P. Therefore, traffic becomes X in reality. Utilities of individuals decrease and excessive traffic occurs. Deadweight loss by traffic congestion is an area of triangle ABC. It is more difficult to measure how urbanized a country is than to measure an income level of a country. With theories above, the urbanization that a country went through and how it was related to growth can be observe. Moreover, sprawl of a country can be observed through diseconomies of urban areas.

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