1. 1 Lecture 1: 11.15 – 12.45 July 4, 2007 Dimetic workshop Pécs, Hungary NETHERLANDS INSTITUTE FOR SPATIAL RESEARCH Modeling the spatial pattern of economic activities in the New Economic Geography II Mark Thissen

2. 2 Contents Case 2: The case of terrorism More about the model: How does it work Sector development is very different within the region Case 3: The case of Road pricing Welfare theory revisited Shortcomings of general equilibrium theory: How to evaluate partial policy?

3. 3 The case study: Brienenoord Bridge Rotterdam

4. 4 How Does RAEM work I: Infrastructure

5. 5 How Does RAEM work II: Trade and product markets

6. 6 Indirect costs of Terrorism 1.Maximum Costs: -Rebuilding Bridge -Temporary misallocation -Permanent prevention policy change -Analysis: short run model without migration 2.Alternative Costs? -Not re-building the Bridge -Analysis: long run model with migration?

7. 7 Effect on Production and Welfare Cost:190 million every year; Rebuilding costs 350 million!

8. 8 Conclusions 1.Rebuild the Bridge! 2.Economic effects can be substantial 3.The effect are very different on a sector level if compared to the effects on a regional level. Agglomerations are not good for everybody!

9. 9 RoadPricing: Research questions 1.How to determine the indirect economic effects of road pricing? -With respect to Agglomeration economies -Not with respect to safety or environmental issues 2.Where are the largest Indirect Cost and benefits due to agglomeration economies? 3.How large are these indirect economic effects due to agglomeration economies (see also lecture 1)? 4.What are the policy implications?

10. 10 Welfare Theory: Benefits to users and owners infrastructure Road pricingInfrastructure Investment Welfare Generalized costs Welfare Generalized costs

11. 11 Road pricing: Problem: Indirect Effect of Transfer in SCGE Determine General Indirect Effect Multiplier (SCGE) -Total effects divided by direct effects (change in generalised costs) due to accessibility changes (Lecture 1) Determine Direct Effect (demand curve) and change in Generalized Costs (travel time and distance) -Transfer is included in direct effect ! -Change in generalized costs represents accessibility change Determine Indirect effect -Multiplier times change in generalised costs Determine total effect Propose a four Step Approach:

12. 12 The Netherlands (2020): Generalized costs change due to Congestion Charge on congested roads. Commute: Large & PositiveFreight: Small & Negative (Results not discussed)

13. 13 Indirect effects Commuting Multiplier Mainly within Regions - labour remains in region Negative effects –Pushing labour out of agglomeration: Wasteful commuting A R U Strong agglomeration economies in “Randstad” –Amsterdam –Rotterdam –Utrecht

14. 14 Direct benefit and generalised costs Commute: Related and both are positive Direct Benefit Change Generalised costs

15. 15 Indirect benefits On relations sign opposite from direct benefit Positive when agglomeration augmenting; negative when dispersion augmenting -Negative Intra-Corop effect Complex in a polycentric economy - Positive and negative indirect Inter-Corop effects

16. 16 Welfare effects of a congestion charge: Indirect versus direct benefits FreightCommute Direct welfare effect travel time gain104141 Direct welfare effect quantity change0-6 Totaal direct welfare effect104135 Indirect intra-region welfare effect-2-44 Indirect intra-region welfare effect385 Total indirect welfare effect141 Indirect effects are substantial Can be positive or negative depending on whether they are agglomeration or dispersion augmenting Congestion charging has also negative indirect effects (intra versus inter corop)

17. 17 Conclusions 1.Indirect effects are small for freight 2.Congestion charging can have negative indirect effect if it is dispersion augmenting 3.The negative effects are especially strong for commuting in congested areas 4.Policy: In those cases that congestion charging has negative indirect effects new infrastructure may be preferred