Second-best cost–benefit analysis in monopolistic competition models of urban agglomeration

This paper examines the agglomeration benefits of a transportation improvement in a city by modeling the microstructure of urban agglomeration based on monopolistic competition of differentiated intermediate products. Properly extended to include variety distortion in addition to price distortion, Harberger’s measure of excess burden yields the agglomeration benefits. The agglomeration benefits are positive if increasing the variety is procompetitive; however, in the anticompetitive case, we cannot exclude the possibility of negative additional benefits. If there are multiple cities, the net agglomeration benefits can be negative when other cities that experience a reduction in population have larger agglomeration economies.