These centripetal forces are potentially balanced by a number of dispersion forces again affecting both the supply and the demand side of relevant markets. These include first the fact that some factors, such as land and labor, are at least partially immobile so their prices might be bidden up as agglomeration goes on, an outcome that will generate an increasing tension for firms having to face fiercer competition in bigger agglomerations. Second, dispersed immobile labor implies that firms agglomerating at a given location neglect distant markets. Finally congestion also bids up the cost of living in large cities.<sup>16</sup> The key point is that when agglomeration forces dominate dispersion forces, a shock to the initial distribution of workers and firms (for example migration by a worker or investment of some capital in a different location) will trigger a cumulative process of agglomeration and all industry and workers will move to one region. Conversely, if dispersion forces dominate, an initial symmetric distribution between two regions will be stable as any shock would be immediately reversed.

Transport costs are what determine the balance between agglomeration and dispersion. In most economic geography models, these are modeled simply as “iceberg” transport costs, i.e. by assuming that a fraction of the goods shipped melts down during transportation. Looking at the effects spelled out above, it appears that both agglomeration and dispersion forces diminish as trade costs decline. For example, the market access effect loses relevance as the differential cost of serving consumers at home or at the other location shrinks, but the wage effect linked to greater competition is also less relevant for firms, and so is the issue of forgoing distant markets. In most models, such as the core-periphery (CP) model of FKV, dispersion forces tend to dominate when transport costs are high, but they decline more rapidly than agglomeration forces when these costs are reduced (see Baldwin et al., 2003, for a more formal discussion). This gives rise to the well-know “tomahawk bifurcation” diagram of FKV, which shows that symmetric dispersed outcomes are stable at high transport costs, while a process of catastrophic agglomeration (in the sense that all firms and workers move to one region) happens below a certain level. Moreover, there is usually a middle range of values for which both dispersion and agglomeration are stable equilibria.<sup>17</sup> Which equilibrium prevails then comes down to historical initial conditions, specific exogenous shocks or policy interventions.

In the range of models discussed so far, the main outcome is the long-run geographical pattern of economic activity.<sup>18</sup> There are at least two reasons why such models are ill-equipped for regional policy analysis. First, shift in the spatial distribution of firms can at best be an intermediate objective for policy makers and the final objective is more likely to combine concerns for output growth and its distribution among the population. Moreover, in these frameworks, industry

> 16 Empirical evidence shows that the cost of living roughly doubles between a city of 100,000 and one of 5 million inhabitants, with wages following. Moreover, higher urban concentration appears to correspond to increased child mortality, higher pupil-teacher ratio and increased use of non-potable water among others (Henderson et al., 2001).

> 17 Note that not all economic geography models display such catastrophic agglomeration process. For example, models with no or limited worker migration are more likely to give rise to intermediate outcomes (Puga, 2001).

> 18 See Baldwin et al. (2003), chapters 2 to 6, for a number of models that display properties close to that of the canonical CP model.

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