A Chamberlinian Agglomeration Model with External Economies of Scale

We investigate the effects of a reduction in trade costs on industrial location and welfare in an economy with external economies of scale. We propose a Chamberlinian agglomeration model with footloose capital, which is analytically-solvable. With respect to industrial location, we demonstrate that a reduction in trade cost is likely to lead to agglomeration. With respect to welfare, we show that agglomeration makes a country with agglomeration better off, and the country without agglomeration better or worse off, depending on the degree of external economies of scale. We also prove that agglomeration makes the overall economy better off.