Spatial Equilibrium with Multiple Cities

Time and space are the two most essential factors for explaining economic reality. Any economic activity takes place at certain place at certain time. Although economic dynamics have caused much attention, the complexity of economic geography has largely been ignored in the mainstream of theoretical economics. It has now become clear that there are a number of potentially important spatial influences, such as public goods, amenities, different externalities, transportation costs, that may challenge the validity of competitive equilibrium theory for explaining a regionally heterogeneous economy. For instance, one of these factors is the so-called capitalization, which implies that the price of land is interdependent with local amenities, economic agents’ densities, transportation costs and other local variables or parameters. Although the significance of capitalization has been noticed by location theorists (Scotchmer and Thisse, 1992), it may be said that we still have no compact framework within which we can satisfactorily explain the issue. Extending the model of the previous chapter, this chapter attempts to suggest a framework to model an economic geographical equilibrium with capitalization.