Transport liberalization and regional imbalances with endogenous freight rates

This paper develops a tractable two-region New Economic Geography model with footloose capital and endogenous freight rates to investigate the welfare implications and long-run industry reallocation patterns triggered by transport liberalization. Two policy scenarios are considered: one where a unique tariff per route is imposed, independently of the direction of shipment, and one of complete deregulation. Carriers in fully deregulated transport markets are shown to charge higher markups in shipments towards the periphery. This pricing behavior counterbalances the welfare-decreasing agglomeration forces associated with lowering trade costs and ensures welfare gains in both region in the short and long run.