An Evaluation Of Agglomeration Economics

“ There are a figure of advantages that may be enjoyed by houses who locate near other houses. These advantages are known as agglomeration economic sciences or external economic systems of graduated table. ” ( Helsley 2003 ) These advantages are known as external because they do non originate from the company itself, but from the external environment. Similar concerns that locate close to each other can bring forth more expeditiously and at a lower cost due to their ability to specialise, entree to resources, lessening in transit and entree to knowledge and information.

Two illustrations of countries that have benefited from the agglomerating of economic systems are the oil and gas industry in Alberta and the Auto industry in Detroit. These industries arose in their specific locations for different grounds but both portion the common conditions of economic systems of graduated table and agglomeration economic sciences. Both of these industries take advantage of the locations by bring forthing more expeditiously and maximising net incomes.

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The Oil Industry in Alberta

The most celebrated oil find in Alberta that truly propelled the industry was made by Imperial Oil 1n 1947 when they struck oil near Leduc. ( ) Oil was nevertheless discovered in Alberta much before so. In the 1910 ‘s a husbandman at Okotoks discovered gas and so subsequently in the 1930 ‘s oil was discovered beneath the gas Fieldss. Because of these two finds international oil companies began operations in Alberta, and in 1923 and 1939 Imperial Oil and British America Oil built refineries in Calgary. In 1938 the Alberta authorities set up the Alberta Energy Conservation Board in 1938, this led the manner for Calgary ‘s development of being the chief disposal centre for the oil and gas industry in Alberta. These early finds helped turn Alberta from one of the poorest states in the Nation into the multibillion dollar imperium that it is today. The ground that the oil and gas industry settled in Alberta was because of geographic location, this is where the majority of the oil and gas in the county resides. Because this industry is based on extraction and processing of a natural resource it needed to turn up where the resource is. However authorities policy has besides helped determine the industry. Government policy, both at the provincial and federal degrees have impacted the oil and gas economic system. Like I antecedently mentioned the provincial authorities in 1938 set of the AECB and this chose Calgary as the chief administrative caput for the industry. More late other authorities plans have besides helped determine the industry by opening up markets and entree to labour, NAFTA is an illustration of this.

Once the industry starts turning it creates many positive outwardnesss that fuel the feedback cringle which in bend grows the economic system some more. There are now several countries of the state that have specialized even further and are now seeing their ain agglomeration economic sciences some illustrations of this are the oil and gas central offices in downtown Calgary and Alberta ‘s Industrial Heartland north E of Edmonton. This country consists of many companies specialising in the petro chemical industry. These companies turn uping in close propinquity greatly reduces their pipe line costs because they can all portion one major grapevine and so merely construct minor lines to each of their workss. In Calgary holding so many companies in close propinquity greatly increases the velocity to which communications and cognition can be transferred and it besides greatly reduces hunt costs for houses looking for skilled labour. Having the oil industry focused in Alberta has besides helped in greatly spread outing research and preparation plans for the industry. Much of this has been developed out of necessity because extraction is going more and more hard and companies need to specialise farther and farther, directional boring and the oil littorals are illustrations of this.

The oil industry has grown into one of the most influential sectors in the county, and has left Alberta, with its freshly found fiscal security to be admired. There are many factors such as a stable authorities, authorities plans and inducements and new cognition and engineerings that have all helped determine the industry into what it now is. However it is impossible to seek and over look the obvious fact that the industry is located where it is because of entree to the valuable resource beneath Alberta ‘s dirts. Alberta has been able to make this powerful agglomerative economic system because of the simple fact that the state contains monolithic militias whether they be shallow gas or the Oil Sands of Fort McMurray.

Detroit ‘s Auto Industry

Detroit or “ Motown ” is the taking Vehicle maker in the United States. It was non ever this manner nevertheless. The first gas powered car was manufactured is Springfield Massachusetts in 1896. The first car to be built in Detroit was manufactured by Olds in 1899. But by 1904 42 % of cars were built in Detroit and so by 1914 this figure rose to 78 % . ( McDonald 2007 ) From 1900 to 1930 the population of Detroit grew quickly from 305 000 to 1 837 000 people this was greatly related to the fact that by 1929 the Auto Mobile industry in Detroit was the largest industry in the Country. In 1909 there were over 200 car makers in the United States this figure nevertheless dropped quickly until it was fundamentally merely the three based out of Detroit ; General Motors, Ford and Chrysler. There are a few other factors that some have contributed to the successes of Detroit, such as the fact that Detroit is a major transportation port and this would give them entree to cheap transit of natural resources, parts and markets. While geographic location may hold played a minor function in the Auto industry in Detroit it is widely recognized that it is non a cardinal component in Detroit ‘s success. ( Klepper 2001 ) The chief ground is merely the fact of Agglomeration Economics. Early car makers were set up all over the county, the 1s that became the most successful merely happened to be the 1s that were setup in close propinquity.

Detroit already had a transportation industry which meant that there was already skilled mechanics that knew gas engines, this gave the car industry entree to these accomplishments. There was besides already makers in topographic point that could construct engines and parts. Because there were so many makers in close propinquity this is were people began traveling to happen work, because with so many companies near together it created the highest odds of happening a occupation. There was besides spill over cognition that other companies could larn from, such as Henry Fords celebrated innovation the assembly line. This greatly reduced cost and rush up the clip in which an car could be manufactured. In 1910 it is said that the assembly line lowered the cost to bring forth one Model T from $ 780 – $ 360. ( McDonlad ) Once the other industries in Detroit saw the great success of this they shortly implemented assembly lines.


There are many benefits to concerns that relocate to a topographic point where there is an agglomerating economic system. The most obvious advantage is economic systems of graduated table. When an industry grows big adequate companies start to specialise. When a market is big plenty and companies start to specialise so costs are reduced. In the car industry if there are portion makers and that is all they specialize in so the car industries may be able to purchase merchandises such as bearings for less than they could bring forth them internally. Or for say the oil industry there might be some kind of boring job and a company needs a particular piece of machinery, it does n’t do since for them to purchase it for merely one job but there is likely another company that has specialized in that piece of machinery so it is cheaper merely to engage them. Production costs are besides greatly reduced in an agglomerative economic system because of a decrease in transit costs, both of people and stuff. In the instance of the Industrial Heartland they can all portion grapevine costs alternatively of holding to all construct their ain, this greatly reduces costs. Equally good if there is adequate industry located in an country it besides may go more economical to hold a rail line put in. As good it makes more sense to hold refineries built in Alberta because this is where the oil production is so it saves on transporting natural resources. Equally good in both cases it greatly reduces on the cost of the transportation of cognition. When an car company has a great new thought or a production technique and you are located near them, so the likely goon of happening out about the thought and benefiting from it is much higher. As good in either case if you have a job and demand aid there is likely person near to you that has had experience covering with that issue, or there might be specialized think armored combat vehicles set up for the industry. When you are working in an country that is really proficient it is of import to hold entree to the best heads and new engineering. As good when you have all of this cognition and experience at your finger tips it does n’t experience as if you ‘re entirely, you are working under old ages of past experience that has greatly reduced the hazard for your concern in the industry. In this instance there is a major advantage compared to person opening a concern far off from the major country of influence.

Equally good as there being benefits to the concern and industry as a hole there are besides advantages of agglomerative economic systems for employees. For case if you were looking for a occupation in an car mill, you would prefer to travel to a metropolis where that are 5 mills so go to a metropolis with lone one, your opportunities of successfully happening a occupation addition if there are more possible places. Equally good when there are more occupations in an country an employee can pick and take and happen the place that most closely matches his or her accomplishment set and desires. If there are more occupations this besides addition chances for an employee to go forth and travel and work for the rival this causes employers to hold to increase wage or working conditions in order to retain their employees. There are other positive outwardnesss along with this, one time workers start to concentrate in an country so other comfortss such as eating houses and shopping promenades will follow.

Agglomeration, nevertheless, may hold a few drawbacks. It may do an country to go to undiversified, such as Alberta we merely late witnessed that a bead in the monetary value of oil causes a backsliding in the full state. Or for Michigan a bead in Auto production has caused a prostration in about the full metropolis. Since 2000 there has been a diminution of over a half million occupations in Detroit this has left huge countries of the metropolis vacant and there is even full office edifices in Detroit ‘s business district which have been left vacant. Equally good there is a term called “ dissagglomeration ” ( Fritzgerald 200 ) In this case a part becomes so successful that it loses its cost nest eggs entreaty. An illustration of this is when it becomes so competitory in an country that it drives existent estate monetary values so high that it becomes no longer economical to turn up in that country. This has become apparent for many workers in Alberta, lodging monetary values have skyrocketed in countries such as Calgary ‘s business district and employees now have to do major commutes. Equally good along with booming concern and successful employees comes the proliferation of offense and human denseness additions and congestion.


In regard to the two illustrations of agglomeration used above they have affected their several parts otherwise. Alberta ‘s oil spot is dining along with this there is an copiousness of good paying occupations. We have seen an addition in the figure of applied scientists and other educated pupils want to come in this field, nevertheless we have seen an even larger figure of pupils either bead out of high school or travel directly from high school to the oil industry because instruction is non needed in order to acquire a well paying occupation. So, over all at that place seems to hold been a diminution in the importance of a station secondary instruction. There has besides been an addition in motion of Canada ‘s uneducated into Alberta to happen occupations. The population denseness in Alberta has drastically increased due to the Oil industry and this has brought jobs such as pollution with it. However, even though there are some drawbacks the Oil and gas Industry decidedly needs to be attributed to the fiscal success and national importance of Alberta.

In Detroit nevertheless it seems to be a different narrative. Historically the affects would look to hold been the same, Detroit was extremely successful attracted a batch of employees and would hold been highly nationally of import because it was lending so much to the economic system. Now nevertheless Detroit seems to be deceasing. The ground for this is the lag in the Auto industry. The clang of the Auto industry can non be linked to agglomeration, the clang of Detroit nevertheless can be partially. Because of agglomeration Detroit did non diversify its economic system really good the Auto sector seemed excessively powerful and moneymaking to worry, now nevertheless with the slow down, we are seeing monolithic layoffs and vacant places.

Part 2


This bunch of concerns would be considered illustrations of agglomeration economic systems. However I feel that non to the same extent, because they would non see as many benefits as the agglomeration of an full industry. They do nevertheless cut down some costs and have some added benefits. By constellating concern can break proctor market tendencies, monitor their competition, as good they may be able to constellate in footings of safety and to assist watch and guard each others ware and tonss. The large benefit though is that a multiple of shops can break attract clients so a individual shop off by itself. By constellating consumers can pass less on transit and they will be more inclined to see the country with the most shops for shopping easiness. Because of the graduated table there are some benefits that I feel they do non acquire to see, such as a lessening in start up costs and a lessening in natural stuff costs. Two illustrations of this type of agglomeration would be the Auto Mile in Wetaskiwin Alberta ;

A – Toyota City

B – Pioneer Chrylser Jeep

D – Schwabs Chevrolet

F – Denham Ford Gross saless

G – Spruce View Motors

H – Union Motors

Equally good as bars along the “ ruddy stat mi ” in Calgary, 17th ave sw ;

Left to Right:

Lewis henry morgans Pub

Mugs Restauraunt

Beckham ‘s Pub

Watchman ‘s Delivery

Red Mile Creamery & A ; Desserts

Melrose Cafe & A ; Bar

Ship & A ; Anchor Pub

Bob the Fish Tavern

Rose & A ; Crown Pub

The Auto Mile in Wetaskiwin is good known and is recognized by its ain Advertisement “ Cars cost less in Wetaskiwin ” . This shows that the country is non merely known for a individual franchise, it is known because there is many franchises together and that attracts concern. As well it is the same for the Red Mile clients want to travel and walk down 17th ave because there is a batch of saloons and eating houses. Because there is a assortment it attracts more clients so if there were merely one concern, even though when there are many concerns they will hold to vie for concern.


Harold Hotellings theoretical account is based largely on transit costs and monetary value. Rather than positive outwardnesss of being side by side. Hotelling assumes that clients choose were to buy their merchandise based on the cost of the good plus transit, add these together and pick the less expensive. Because of this houses will put up in the same cardinal location to maximise exposure and avoid being placed between two other shops and acquiring squeezed out. Harmonizing to Hotelling houses choose their location based purely on maximising the sum of people in their country relation to the competition. Two illustrations of this are Fast Food eating houses and gas Stationss. In both these instances rivals either be given to be side by or across the street from each other. So even though in both of these instances it is the houses turn uping near to one another it is for really different grounds. In the Hotelling theory houses cluster for competitory grounds and in agglomeration economic sciences they cluster for the economic benefits and economic systems of graduated table.


Profiting from constellating or non is most likely a instance by instance scenario. It will non be the same for all types of industries and will necessitate to be calculated on a instance by instance footing. No affair what the instance, competition will increase by constellating and this should lower monetary values. In the Hotteling theoretical account the reduced monetary values are offset by the increased client base that constellating creates so it all depends on whether or non this does so countervail the decreased monetary values. Agglomeration economic systems on the other manus benefit from reduced costs, greater people, information etc. In agglomeration economic sciences the benefits are ever purportedly positive otherwise they would non keep true and concern would relocate to be near to one another. The Hotelling theoretical account is based on competiveness where as agglomeration economic sciences are based on maximising benefit.


I believe that whether or non houses cluster and how they benefit from it or non is mostly dependent on what degree of the economic system they are in and what type of good. It would look that fabricating degree houses would profit from constellating through agglomeration economic sciences. These are the houses such as oil and gas refineries and car fabrication. They have extremely substitutable merchandises and they do non market to the terminal consumer, and hence would greatly profit from the decreased costs. Where as an industry like the vesture shops market straight to the terminal consumer and hence benefit from increased exposure and distinction and hence benefit from constellating through the Hotelling theoretical account. The countries within a metropolis where this type of bunch occurs are usually really high traffic countries with tonss of people.

In footings of agglomeration economic sciences I do non experience that a big ground tackle renter is required, these concerns are by and large non looking for attending they are merely desiring to bring forth at a low cost. Where as in an country with bunchs of consumer goods shops, an ground tackle renter may be helpful. But I do non cognize if it would be necessary. If for case a big shop may non necessitate to be in a bunch, they might pull adequate attending by themselves and people will go, where as if you a minor shop so you likely would necessitate to be a bunch to pull concern to your shop.



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