Regional costs-of-living with congestion and amenity differences : an economic geography perspective

Abstract

Standard models of the “new economic geography” predict that costs-of-living are low in the central and high in peripheral region, due to the fact that consumers in the periphery have to bear transportation cost for manufacturing varieties. In reality, however, only some goods are cheaper in economic centres, whereas the overall costs-of-living (including housing costs) tend to be higher. In this paper we use an analytically tractable economic geography model with an immobile housing stock, so that regional agglomeration drives up housing prices. We show that a core-periphery structure can endogenously emerge in which the core is the more expensive area in equilibrium. We also analyse the efficiency of spatial cost-of-living differences and augment the model to include an exogenous regional difference in the form of a consumption amenity.