Location matters. The most striking example is the highly uneven distribution of population and wealth across space. For example, cities occupy approximately 2 percent of the Earth’s land surface, but host more than half of the world’s population and produce about 80 percent of its economic output. The twenty most populous US metropolitan statistical areas (MSAs) account for almost 45 percent of the total US population and produce 52.2 percent of total US GDP on barely 15.2 percent of total US surface. Similar patterns hold for other countries, with even starker concentrations of population and economic activity in the growing megalopolises of developing countries. This entry discusses why population and economic activity are not more evenly spread across space. The first reason that comes to mind is that places are intrinsically heterogeneous along different dimensions such as topography, resource endowments, access to natural transportation routes, or climate. More importantly, what makes a location desirable to an agent is the unintended byproduct of the other agents’ location choices: everyone cares about her own position, but the actual choice is relative to those of the others. To put it differently, the desirability of a specific location depends on where the others are located. This simple fact is the essence of spatial equilibrium, a formal concept used by economists to analyze the spatial distribution of economic agents and activity. It describes a situation where each economic agent optimally chooses her own location—taking the locations of the others as given—and where these interdependent location choices are mutually compatible. The outcome is determined by the interplay between two sets of competing forces. First, everything else equal, agents want to be close together (“agglomeration forces”). This comes from the fact that moving people, goods, and ideas across space is costly, which pushes toward geographic concentration to reduce these costs and increase the benefits generated by clustering. Second, everything else equal, there are limits to geographic concentration at any point in space, which tends to push agents apart (“dispersion forces”). The main limits to agglomeration lie in competition for land, which is an immobile good in (more or less) limited supply, and different other negatives—congestion, noise, pollution—that increase with geographic concentration. Because only a limited number of agents can be spatially close to each other, most interactions occur across distant locations and are, therefore, costly. Each agent trades off the benefits generated by the agglomeration forces and the costs generated by the dispersion forces to choose his or her own location, which depends on where the others are located. The resulting spatial equilibrium is the outcome of these interdependent optimization processes carried out by economic agents who pursue their own interests.
There is no dearth of excellent introductions to the economics of cities and regions. This section contains general overviews that provide a good starting point to explore the different aspects of the spatial equilibrium concept. When taken together they also put that concept into a historical perspective. Henderson 1988 is the first analytical treatment of the spatial equilibrium concept in a system of cities, while Fujita 1989 introduces the analytical tool of the bid rent function to provide an integrated treatment of spatial equilibrium, land use, and city size. Paul Krugman has developed a different approach that relies more on trade and the mobility of production factors than on cities. His book Krugman 1991 is a nontechnical introduction to the key elements of the canonical “core-periphery model.” In the next two decades, the emphasis has been on what became known as “new economic geography.” Fujita, et al. 1999 provides a state-of-the-art overview of what has been accomplished in the 1990s. Combes, et al. 2008 integrates the trade and new economic geography theories and explores their empirical validations. Glaeser 2008 follows an approach that differs from new economic geography by focusing on cities and the spatial equilibrium concept in a world à la Rosen-Roback. While the above-mentioned contributions focus on two distinct, but complementary, models of the space-economy, Fujita and Thisse 2013 gives an integrated treatment of the various economic theories and models that aim to explain why the agglomeration of activities occurs at different spatial scales, i.e., from the global to the local through the national and the urban. More recently, Brakman, et al. 2019 is a good starting point for those who seek to get acquainted with spatial economics and its tools, including the concepts of spatial equilibrium, agglomeration forces, and dispersion forces. Any economic field may a priori benefit from integrating spatial variables. Nevertheless, the cross-fertilization is more fruitful with some economic fields than with others. In particular, the spatial equilibrium concept has numerous applications in labor economics when workers are mobile in space. Zenou 2009 surveys a wide range of relevant concepts and results from urban and labor economics, while Moretti 2012 discusses in a nontechnical way the causes and consequences of the spatial sorting of skills.
Brakman, Steven, Harry Garretsen, and Charles van Marrewijk. A Spiky World: An Introduction to Urban and Geographical Economics. Cambridge, UK: Cambridge University Press, 2019.
This book provides a deep but highly readable introduction to geographical and urban economics, taking into consideration the shift in focus in the field toward cities and empirical methods.
Combes, Pierre-Philippe, Thierry Mayer, and Jacques-François Thisse. Economic Geography: The Integrations of Regions and Nations. Princeton, NJ: Princeton University Press, 2008.
Focuses on trade theory and regional economics to explain why, even in societies where the circulation of people, goods, and ideas is becoming increasingly easy, economic activity is concentrated in a relatively limited number of areas.
Fujita, Masahisa. Urban Economic Theory: Land Use and City Size. Cambridge, UK: Cambridge University Press, 1989.
This monograph develops in depth the tools used in modern urban economics. It provides an early treatment of location patterns when households are heterogeneous in incomes and emphasizes the role of urban externalities.
Fujita, Masahisa, Paul Krugman, and Anthony J. Venables. The Spatial Economy: Cities, Regions, and International Trade. Cambridge, MA: MIT Press, 1999.
This technical book introduces the machinery underlying the core-periphery model and its various extensions. It emphasizes continuous space, the existence of multiple spatial equilibria, and evolutionary aspects of equilibrium selection and stability.
Fujita, Masahisa, and Jacques-François Thisse. Economics of Agglomeration: Cities, Industrial Location, and Globalization. 2d ed. Cambridge, UK: Cambridge University Press, 2013.
The main thrust of the book is that a few basic ideas and concepts lie at the foundations of the still-needed general theory of location.
Glaeser, Edward L. Cities, Agglomeration, and Spatial Equilibrium. Oxford: Oxford University Press, 2008.
Shows how the concept of spatial equilibrium can be used to investigate, among other things, whether cities are mainly good places to live or to work. Particular emphasis is placed on illustrating the models with empirical evidence, drawn mainly from US data and cities.
Henderson, J. Vernon. Urban Development: Theory, Fact, and Illusion. Oxford: Oxford University Press, 1988.
Discusses a large variety of theoretical and empirical aspects related to the workings of cities. Particular emphasis is put on the role of urban policy for optimal city size and efficiency, as well as on the nature and sources of agglomeration economies.
Krugman, Paul R. Geography and Trade. Cambridge, MA: MIT Press, 1991.
Explains in a highly readable way the forces pushing toward the geographic concentration of economic activity at the interregional scale. It also shows why a spatial equilibrium with large regional imbalances is likely to occur in a world where shipping goods is cheap and scale economies are large.
Moretti, Enrico. The New Geography of Jobs. Boston: Houghton Mifflin Harcourt, 2012.
Provides a nontechnical discussion of the spatial sorting of skilled workers across cities and discusses the resulting uneven geographical distribution of human capital in modern economies, as well as their various social consequences.
Zenou, Yves. Urban Labor Economics. Cambridge, UK: Cambridge University Press, 2009.
This comprehensive book provides a detailed analysis of the various aspects that characterize urban labor markets. It does so by combining search and matching frictions and efficiency wages on labor markets with residential choices on a land market. It also highlights the controversial issue of spatial mismatch.
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