Xueqin Zhu, Free University, Dept. of Spatial Economics / Netherlands Bureau for Economic Policy Analysis, Amsterdam / Den Haag, The Netherlands
Towards spatial general equilibrium modelling - representing imperfect competition and transport costs in an AGE model (assigned to theme
We are faced with a series of problems in general equilibrium modelling, which are not systematically addressed in the existing non-spatial economics literature. Firstly, in standard Applied General Equilibrium (AGE) models, perfect competition is assumed. However, competitive market assumption seems not always plausible in reality. Instead imperfect competition probably suggests an agglomeration effect, which has important spatial impacts. Secondly, agglomeration is often related to ‘increasing return to scale’, which again departs from the standard assumption of AGE models. Such a departure often brings complication to solving a model because of the implied non-convexity. Thirdly, policy measures even without a spatial focus generally tend to have differential spatial effects. Hence, there is a need to examine those spatial effects (location-specific) for better policy assessment. These spatial effects can be caused by many factors such as differences in locational circumstances or transport costs. This paper aims to present a model framework which contains imperfect competition and transport costs, to discuss its theoretical properties and to illustrate its application in a numerical example. By proper modelling, we wish to obtain more insights into the spatial effects of policy measures.
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