Question

Explain the concept of agglomeration economies and why agglomeration economies are crucial for the economic vitality of cities.

Answer 1

Concentration provides benefits to businesses as they combine with, among other things, a spillover of information or resources due to the presence of externalities. Such externalities are a cause of higher business efficiency and hence higher profit. Externalities are referred to as agglomeration economies or disease economies which refer to either attraction forces leading to agents clustering, or forces opposing this agglomeration.

Given the study of agglomeration economies as part of economics in the 19th century, empirical results were not entirely successful due to problems in evaluating the impact of agglomeration economies on urban development as a result of difficulties in implementing this theoretical definition in quantitative models and lack of information to allow model estimation. There is a long list of connections between the impacts of agglomeration economies on urban development.

Urban economics established four main causes for the cluster of companies; sharing intermediate inputs, sharing labor pool, matching labor and spillovering information. The first relates to advantages that reflect the relationship between producers and manufacturers in order to obtain appropriate inputs, as is the case for industries that do not need standardized inputs or that the inputs have a higher rate of innovation shift. Clustering can thus provide manufacturers with cost savings, such as finding specialist suppliers with lower prices due to suppliers ' leveraging of economies of scale