Evaluating benefits of transportation in models of new economic geography

In the presence of price distortions, cost-benefit analysis must include changes in the deadweight loss in addition to the direct benefits and costs to transportation users and nonusers. Advances in new economic geography (NEG) have highlighted the importance of price distortions associated with imperfect competition. This paper reviews recent contributions to cost-benefit analysis in NEG models, and explores which elements of the models have contributed to the differences in the results obtained.

► We review recent contributions to cost-benefit analysis in NEG models. ► We identify three elements that have contributed to the differences in the results. ► The three are demand structure, variety endogeneity, and cost reduction types. ► The Harberger formula should be extended to include variety distortion.