Introduction

So far we have paid little attention to the policy implications (if any) that arise from geographical economics. Can geographical economics be used for policy analysis? This chapter addresses this important question. Two opposing views on the usefulness of geographical economics for policy purposes come to the fore. According to the first view (see Baldwin et al., 2003, and Ottaviano, 2003), it is useful to take the core models literally regarding the main policy implications they show. The idea is that, by sticking to the simple models of chapters 3 and 4, the policy differences between geographical economics and other approaches are most clearly visible. The dangers of taking the core models too seriously for policy purposes have, however, been emphasized by both economists (Neary, 2001) and geographers (Martin, 1999). While not neglecting this second view (see also chapter 12), we mainly follow the first view and try to draw out the policy implications from the core models, if only because these models are by now familiar to the reader.

This chapter is organized as follows. In the next section (based largely on Ottaviano, 2003), we briefly discuss the general policy implications of the core model of geographical economics. We single out three policy issues:

1. (i). government taxation and spending;

2. (ii). changing the infrastructure and transport costs; and

3. (iii). the welfare implications.

In section 11.3 regional policy in the form of tax competition is discussed.