Localization and Urbanization Economies are two types of external
economies of scale
In microeconomics, economies of scale are the cost advantages that enterprises obtain due to their scale of operation, and are typically measured by the amount of output produced per unit of time. A decrease in cost per unit of output enables ...
, or agglomeration economies. External economies of scale result from an increase in the productivity of an entire industry, region, or economy due to factors outside of an individual company. There are three sources of external economies of scale:
input sharing ,
labor market pooling, and
knowledge spillover Knowledge spillover is an exchange of ideas among individuals.Carlino, Gerald A. (2001) Business Review Knowledge Spillovers: Cities' Role in the New Economy.'' Q4 2001. In knowledge management economics, knowledge spillovers are non-rival knowledg ...
s (Marshall, 1920).
Localization economies occur when an increase in the size of an industry in a city leads to an increase in productivity of a particular activity.
Alfred Marshall
Alfred Marshall (26 July 1842 – 13 July 1924) was an English economist, and was one of the most influential economists of his time. His book '' Principles of Economics'' (1890) was the dominant economic textbook in England for many years. I ...
(1920) introduced the idea that the localization of industry can increase productivity in his book
Principles of Economics. The highly concentrated
high tech industry in
Silicon Valley
Silicon Valley is a region in Northern California that serves as a global center for high technology and innovation. Located in the southern part of the San Francisco Bay Area, it corresponds roughly to the geographical areas San Mateo County ...
exemplifies industrial localization. Although the cost of labor and land in Silicon Valley is very high, high tech firms continue to locate there because of the added benefit they receive from their proximity to a high-skilled labor pool. The size of the high tech industry, creates positive externalities for each firm located in Silicon Valley.
Urbanization economies arise when the size of the city leads to an increase in productivity.
Los Angeles
Los Angeles ( ; es, Los Ángeles, link=no , ), often referred to by its initials L.A., is the largest city in the state of California and the second most populous city in the United States after New York City, as well as one of the world' ...
exemplifies urbanization economies in that it has no single dominant industry, yet continues to grow. Firms which locate in Los Angeles benefit from the common resources and large labor pool found in the city. Common resources such as roads, buildings and power supply benefit firms in cities regardless of their industry. Also, firms have better access to labor by locating in cities. The urban environment creates positive externalities that benefit several different industries.
Jane Jacobs
Jane Jacobs (''née'' Butzner; 4 May 1916 – 25 April 2006) was an American-Canadian journalist, author, theorist, and activist who influenced urban studies, sociology, and economics. Her book '' The Death and Life of Great American Cities ...
is often credited with the idea that urban diversity and a city’s size leads to agglomeration economies. However, Marshall’s (1920) discussion of urban diversity predates her work.
[Rosenthal and Strange, 2004]
References
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Urban planning