Location Choice
Civic geography

A combination of private and public facilities determines the geography of modern cities. Large private firms both influence consumers' residential choices and anticipate the effects of their own locational choices on the residential pattern, while the locations of many public facilities affect the locational choices of households and firms alike. When there are small numbers of large firms, their strategic interactions become critical and may themselves be affected by the presence of public facilities or other particular geographical features. In Discussion Paper No. 933, Research Fellow Jacques-François Thisse and David Wildasin develop a simple model of a single public facility (whose location is given) and duopolistic private firms to identify the optimal and equilibrium spatial configurations of firms and households. They find that equilibrium outcomes are often sub-optimal even if there are no congestion or other technological or consumption externalities.

Thisse and Wildasin show that strategic externalities arising between firms may cause them to be excessively or insufficiently dispersed, depending on the precise configuration of critical parameters including the cost of transport, but a combination of taxes on and subsidies to transport may remove this market failure and support an efficient locational pattern. These results differ significantly from those identified in conventional transport economics, which typically ignore strategic considerations. The authors' comparative statics analysis reveals that the fall in the optimal tax precisely matches the rise in the real transport cost per unit of distance, so the total cost of transport will therefore remain constant in the face of technological change. Any real reductions in its cost will therefore affect neither the urban structure nor consumers' travel patterns. Improved transport facilities may nevertheless yield benefits in the form of higher consumption and profits, as a fall in the real cost of travel allows the redistribution to consumers of the taxes required to preserve the optimal spatial figuration.

Optimal Transportation Policy with Strategic Locational Choice
Jacques-François Thisse and David E Wildasin

Discussion Paper No. 933, April 1994 (IO)