Economies of agglomeration

However, agglomeration effects also explain some social phenomena, such as large proportions of the population being clustered in cities and major urban centers.

For example, spatially concentrated growth in automobile-oriented fields may create problems of crowding and traffic congestion.

At the foundational level, proximity—especially to other facilities and suppliers—is a driving force behind economic growth and is one explanation for why agglomeration effects are so evident in major urban centers.

This helps accumulate information and the flow of new and innovative ideas among firms to achieve what economists call increasing returns to scale.

Benefits arise from the spatial agglomeration of physical capital, companies, consumers, and workers:[9] While the existence of cities can only persist if the advantages outweigh the disadvantages, poorly planned agglomerations may also lead to negative externalities like traffic congestion (lack of walkability and public transport) or pollution (lack of environmental protection laws).

[13] Another source of agglomeration diseconomies—higher crowding and increased waiting time—can be observed in disciplines or industries that are characterized by constrained access to relevant production facilities or resources.

[15] The Oxford development economist Paul Collier proposed that the gains of agglomeration should be taxed as rents, which leads to behavior-distorting rent-seeking (Henry George theorem).

Collier recommended a tax calculated by combining high-income and metropolitan locations, which can then be redistributed to other cities that have been hard hit by agglomeration.

The third benefit is the relative ease of communication and exchange of supplies, laborers, and innovative ideas due to the proximity among firms.

It provides increasing returns on scale for each of the firms located within that area because of the proximity to available sources needed for production.

One final advantage of this source is that clustering in specific fields leads to quicker diffusion or adoption of ideas.

This technological impact, specifically in the communications field, will provide and dismiss the barrier between firms in the same industry located further away and nearby, leading to a greater concentration of information flow and economic production and activity.