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Technological Externalities

In: Social Issues

Submitted By caod23
Words 1155
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Explain the role of technological externalities as a cause of differences in urban productivity and growth. Taking a look at the map, one can easily identify the uneven distribution of population and the clustering of economic activities around the world. Such clustering of economic activities happens at both regional and national levels and is more formally known as agglomeration. Empirical evidence (Quigley, 1998) has shown that the increase in the productivity of a city is more than proportionate to the increase in the density of the city, which justifies why firms tend to cluster and concentrate in the same region. Recent work on economic growth views externalities, especially knowledge spillovers, as the ‘engine of growth’ (Romer 1986; Lucas 1988). This essay is going to examine how technological externalities contribute to the agglomeration of firms and thus leads to different productivity.

Externalities involve interdependence of utility, production or profit functions. There are two types of externalities: pecuniary externality and technological externality. Pecuniary externality is market interdependent and it affects firms demand and profit by changes in price. Technological, in the contrast, has no involvement with market and it occurs when the well-being of a consumer or output of a firm are directly affected by the action of another agent in the economy. Krugman (1991) firmly believes that the externalities that sometimes lead to emergence of a core-periphery pattern are pecuniary externalities rather than purely technological spillovers. He suggests that analysis will be more concrete if we focus on pecuniary externality than if we focus on technological externality which arise in some invisible form. Marshall (1890) has argued that firms in the same industry often locate next to each other to share various inputs, including specialized labor....

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