Chapter 58. Agglomeration and Economic Geography

Peaks and troughs in the spatial distributions of population, employment and wealth are a universal phenomenon in search of a general theory. Such spatial imbalances have two possible explanations. In the first one, uneven economic development can be seen as the result of the uneven distribution of natural resources. This is sometimes called first nature and refers to exogenously given characteristics of different sites. However, it falls short of providing a reasonable explanation of many other clusters of activities, which are much less dependent on natural advantage. The aim of geographical economics is precisely to understand what are the economic forces that, after controlling for first nature, account for second nature, which emerges as the outcome of human beings actions to improve upon the first one. Specifically, geographical economics asks what are the economic forces that can sustain a large permanent imbalance in the distribution of economic activities. In this paper, we focus on the so-called new economic geography approach. After having described some of the main results developed in standard location theory, we use a unified framework to survey the home market effect as well as coreperiphery models. These models have been criticized by geographers because they account for some spatial costs while putting others aside without saying why. Furthermore, coreperiphery models also exhibit some extreme features that are reflected in their bangbang outcomes. We thus move on by investigating what the outcomes of coreperiphery models become when we account for a more complete and richer description of the spatial aspects that these models aim at describing. We conclude by suggesting new lines of research.