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Scale Economies and Cities

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  • Indermit S. Gill
  • Chor-Ching Goh

Abstract

This paper summarizes the policy-relevant insights of a generation of research on scale economies. Scale economies in production are of three types: internal economies associated with large plants, localization economies that come from sharing of inputs and infrastructure and from greater competition among firms, and urbanization economies that are generated through diversity and knowledge spillovers. The benefits (and costs) of localization and urbanization are together called "external (dis) economies" because they arise due to factors outside any single household, farm or firm. The empirical literature yields some stylized facts. Internal scale economies are low in light industries and high in heavy industries. External scale economies are amplified by economic density and dissipate with distance from places where economic activity is concentrated. Scale economies are most visibly manifest in towns and cities. To simplify somewhat, towns allow firms and farms to exploit internal scale economies, medium-sized cities help firms in an industry exploit localization economies, and large cities and metropolises provide urbanization economies to those who locate within or nearby. Scale economies have implications for policy makers. The first is that because urban settlements rise and thrive because market agents demand their services, they should be seen as creatures of the market, not creations of the state. The second is that because settlements of different sizes provide differing services, towns, cities, and metropolises are more often complements for one another, not substitutes. Third, as a corollary, policymakers should aim to improve the functioning of urban settlements, and not become preoccupied with their size. Copyright 2010, Oxford University Press.

Suggested Citation

  • Indermit S. Gill & Chor-Ching Goh, 2010. "Scale Economies and Cities," The World Bank Research Observer, World Bank, vol. 25(2), pages 235-262, August.
  • Handle: RePEc:oup:wbrobs:v:25:y:2010:i:2:p:235-262
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    File URL: http://hdl.handle.net/10.1093/wbro/lkp022
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    Cited by:

    1. Marco Sanfilippo & Adnan Seric, 2016. "Spillovers from agglomerations and inward FDI: a multilevel analysis on sub-Saharan African firms," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 152(1), pages 147-176, February.
    2. Giray Gozgor & Baris Kablamaci, 2015. "What happened to urbanization in the globalization era? An empirical examination for poor emerging countries," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 55(2), pages 533-553, December.
    3. Manuel Rivera, 2013. "Political Criteria for Sustainable Development Goal (SDG) Selection and the Role of the Urban Dimension," Sustainability, MDPI, vol. 5(12), pages 1-18, November.
    4. Sangita Kamdar, 2021. "Million Plus Population Cities of India: An Analysis of Economic Performance and Quality of Life," Indian Journal of Human Development, , vol. 15(2), pages 295-306, August.
    5. Ejaz Ghani & Arti Grover Goswami & William R. Kerr, 2016. "Highway to Success: The Impact of the Golden Quadrilateral Project for the Location and Performance of Indian Manufacturing," Economic Journal, Royal Economic Society, vol. 126(591), pages 317-357, March.
    6. Khoirunurrofik, 2018. "Local economic structure, productivity growth, and industry life cycle: evidence from Indonesia," Asia-Pacific Journal of Regional Science, Springer, vol. 2(2), pages 453-475, August.
    7. Marco Sanfilippo & Adnan Seric, 2014. "Spillovers from agglomerations and inward FDI. A Multilevel Analysis on SSA domestic firms," RSCAS Working Papers 2014/76, European University Institute.
    8. Ghani, Ejaz & Goswami, Arti Grover & Kerr, William R., 2013. "Highway to success in India : the impact of the golden quadrilateral project for the location and performance of manufacturing," Policy Research Working Paper Series 6320, The World Bank.
    9. Khoirunurrofik, 2020. "Does the Crisis Change the Nature of Agglomeration Economies in Indonesia? : A Productivity Analysis of Pre-Post 1997-1998 Financial Crisis," REGION, European Regional Science Association, vol. 7, pages 85-106.
    10. Kollai, István, 2019. "Elszegényítő központi régiók? A területi egyenlőtlenség lehetséges mozgatórugói Szlovákiában [Core regions impoverished? Spread and backwash effects on territorial inequality in 21st-century Centra," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(11), pages 1125-1144.
    11. Li,Yue - SARCE & Rama,Martin G., 2015. "Households or locations ? cities, catchment areas and prosperity in India," Policy Research Working Paper Series 7473, The World Bank.

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