Core-Periphery Market Failure in the Location of Economic Activity

Using a simplified theoretical model, we illustrate the potential existence of a market failure in the location of economic activity, which could lead to an exaggerated concentration in the core region. Based on this, we analyze whether a public policy intervention of decreasing the mobility costs of production factors could lead to the elimination of, or at least a decrease in, the consequences of a market failure. We show that the market failure can be eliminated only when the reduction in mobility costs is made concurrently with changing exogenous conditions in the peripheral regions (such as improvements in infrastructure).