An Introduction to Regional Economics
Edgar M. Hoover and Frank Giarratani

Economic systems are dynamic entities, and the nature and consequences of changes that take place in these systems are of considerable importance. Such change affects the well-being of individuals and ultimately the social and political fabric of community and nation. As social beings, we cannot help but react to the changes we observe. For some people that reaction is quite passive; the economy changes, and they find that their immediate environment is somehow different, forcing adjustment to the new reality. For others, changes in the economic system represent a challenge; they seek to understand the nature of factors that have led to change and may, in light of that knowledge, adjust their own patterns of behavior or attempt to bring about change in the economic, political, and social systems in which they live and work.

In this context, regional economics represents a framework within which the spatial character of economic systems may be understood. We seek to identify the factors governing the distribution of economic activity over space and to recognize that as this distribution changes, there will be important consequences for individuals and for communities.

Thus, regional or "spatial" economics might be summed up in the question "What is where, and why—and so what?" The first what refers to every type of economic activity: not only production establishments in the narrow sense of factories, farms, and mines, but also other kinds of businesses, households, and private and public institutions. Where refers to location in relation to other economic activity; it involves questions of proximity, concentration, dispersion, and similarity or disparity of spatial patterns, and it can be discussed either in broad terms, such as among regions, or microgeographically, in terms of zones, neighborhoods, and sites. The why and the so what refer to interpretations within the somewhat elastic limits of the economist's competence and daring.

Regional economics is a relatively young branch of economics. Its late start exemplifies the regrettable tendency of formal professional disciplines to lose contact with one another and to neglect some important problem areas that require a mixture of approaches. Until fairly recently, traditional economists ignored the where question altogether, finding plenty of problems to occupy them without giving any spatial dimension to their analysis. Traditional geographers, though directly concerned with what is where, lacked any real technique of explanation in terms of human behavior and institutions to supply the why, and resorted to mere description and mapping. Traditional city planners, similarly limited, remained preoccupied with the physical and aesthetic aspects of idealized urban layouts.

This unfortunate situation has been corrected to a remarkable extent within the last few decades. Individuals who call themselves by various professional labels—economists, geographers, ecologists, city and regional planners, regional scientists, and urbanists—have joined to develop analytical tools and skills, and to apply them to some of the most pressing problems of the time.

The unflagging pioneer work and the intellectual and organizational leadership of Walter Isard since the 1940s played a key role in enlisting support from various disciplines to create this new focus. His domain of "regional science" is extremely broad. This book will follow a less comprehensive approach, using the special interests and capabilities of the economist as a point of departure.


It will be helpful to realize at the outset that three fundamental considerations underlie the complex patterns of location of economic activity and most of the major problems of regional economics.

The first of these "foundation stones" appears in the simplistic explanations of the location of industries and cities that can still be found in old-style geography books. Wine and movies are made in California because there is plenty of sunshine there; New York and New Orleans are great port cities because each has a natural water-level route to the interior of the country; easily developable waterpower sites located the early mill towns of New England; and so on. In other words, the unequal distribution of climate, minerals, soil, topography, and most other natural features helps to explain the location of many kinds of economic activity. A bit more generally and in the more precise terminology of economic theory, we can identify the complete or partial immobility of land and other productive factors as one essential part of any explanation of what is where. Such immobility lies at the heart of the comparative advantage that various regions enjoy for specialization in production and trade.

This is, however, by no means an adequate explanation. One of the pioneers of regional economics, August Lösch, set himself the question of what kind of location patterns might logically be expected to appear in an imaginary world in which all natural resource differentials were assumed away, that is, in a uniformly endowed flat plain.1  In such a situation, one might conceivably expect (1) concentration of all activities at one spot, (2) uniform dispersion of all activities over the entire area (that is, perfect homogeneity), or (3) no systematic pattern at all, but a random scatter of activities. What does actually appear as the logical outcome is none of these, but an elaborate and interesting regular pattern somewhat akin to various crystal structures and showing some recognizable similarity to real-world patterns of distribution of cities and towns. We shall have a look at this pattern in Chapter 8. What the Christaller-Lösch theoretical exercises demonstrated was that factors other than natural-resource location play an important part in explaining the spatial pattern of activities.

In developing his abstract model, Lösch assumed just two economic constraints determining location: (1) economies of spatial concentration and (2) transport costs. These are the second and third essential foundation stones.

Economists have long been aware of the importance of economies of scale, particularly since the days of Adam Smith, and have analyzed them largely in terms of imperfect divisibility of production factors and other goods and services. The economies of spatial concentration in their turn can, as we shall see in Chapter 5 and elsewhere, be traced mainly to economies of scale in specific industries.

Finally, goods and services are not freely or instantaneously mobile: Transport and communication cost something in effort and time. These costs limit the extent to which advantages of natural endowment or economies of spatial concentration can be realized.

To sum up, an understanding of spatial and regional economic problems can be built on three facts of life: (1) natural-resource advantages, (2) economies of concentration, and (3) costs of transport and communication. In more technical language, these foundation stones can be identified as (1) imperfect factor mobility, (2) imperfect divisibility, and (3) imperfect mobility of goods and services.


What, then, are the actual problems in which an understanding of spatial economics can be helpful? They arise, as we shall see, on several different levels. Some are primarily microeconomic, involving the spatial preferences, decisions, and experiences of such units as households or business firms. Others involve the behavior of large groups of people, whole industries, or such areas as cities or regions. To give some idea of the range of questions involved and also the approach that this book takes in developing a conceptual framework to handle them, we shall follow here a sequence corresponding to the successive later chapters.

The business firm is, of course, most directly interested in what regional economics may have to say about choosing a profitable location in relation to given markets, sources of materials, labor, services, and other relevant location factors. A nonbusiness unit such as a household, institution, or public facility faces an analogous problem of location choice, though the specific location factors to be considered may be rather different and less subject to evaluation in terms of price and profit. Our survey of regional economics begins in Chapter 2 by taking a microeconomic viewpoint. That is, all locations, conditions, and activities other than the individual unit in question will be taken as given: The individual unit's problem is to decide what location it prefers.

The importance of transport and communication services in determining locations (one of the three foundation stones) will become evident in Chapter 2. The relation of distance to the cost of the spatial movement of goods and services, however, is not simple. It depends on such factors as route layouts, scale economies in terminal and carriage operations, the length of the journey, the characteristics of the goods and services transferred, and the technical capabilities of the available transport and communication media. Chapter 3 identifies and explains such relations and will explore their effects on the advantages of different locations.

In Chapter 4, an analysis of pricing decisions and demand in a spatial context is developed. This analysis extends some principles of economics concerning the theory of pricing and output decisions to the spatial dimension. As a result, we shall be able to appreciate more fully the relationship between pricing policies and the market area of a seller. We shall find also that space provides yet another dimension for competition among sellers. Further, this analysis will serve as a basis for understanding the location patterns of whole industries. If an individual firm or other unit has any but the most myopic outlook, it will want to know something about shifts in such patterns. For example, a firm producing oil-drilling or refinery equipment should be interested in the locational shifts in the oil industry and a business firm enjoying favorable access to a market should want to know whether it is likely that more competition will be coming its way.

While some of the issues developed in Chapter 4 concern factors that contribute to the dispersion of sellers within an industry, Chapter 5 recognizes the powerful forces that may draw sellers together in space. From an analysis of various types of economies of spatial concentration and a description of empirical evidence bearing on their significance, we shall find that the nature of this foundation stone of location decisions can have important consequences for local areas or regions.

Chapter 6 introduces explicit recognition of the fact that activities require space. Space (or distance, which is simply space in one dimension) plays an interestingly dual role in the location of activities. On the one hand, distance represents cost and inconvenience when there is a need for access (for instance, in commuting to work or delivering a product to the market), and transport and communication represent more or less costly ways of surmounting the handicaps to human interaction imposed by distance. But at the same time, every human activity requires space for itself. In intensively developed areas, sheer elbowroom as well as the amenities of privacy are scarce and valuable. In this context, space and distance appear as assets rather than as liabilities.

Chapter 6 treats competition for space as a factor helping to determine location patterns and individual choices. The focus here is still more "macro" than the discussion of location patterns developed in preceding chapters, in that it is concerned with the spatial ordering of different types of land use around some special point—for example, zones of different kinds of agriculture around a market center. In Chapter 6, the location patterns of many industries or other activities are considered as constituents of the land-use pattern of an area, like pieces of a jigsaw puzzle. Many of the real problems with which regional economies deal are in fact posed in terms of land use (How is this site or area best used?) rather than in terms of location per se (Where is this firm, household, or industry best situated?). The insights developed in this chapter are relevant, then, not only for the individual locators but also for those owning land, operating transit or other utility services, or otherwise having a stake in what happens to a given piece of territory.

The land-use analysis of Chapter 6 serves also as a basis for understanding the spatial organization of economic activity within urban areas. For this reason, Chapter 7 employs the principles of resource allocation that govern land use and exposes the fundamental spatial structure of urban areas. Consideration is given also to the reasons for and implications of changes in urban spatial structure. This analysis provides a framework for understanding a diverse array of problems faced by city planners and community developers and redevelopers.

In Chapter 8, the focus is broadened once more in order to understand patterns of urbanization within a region: the spacing, sizes, and functions of cities, and particularly the relationship between size and function. Real-world questions involving this so-called central-place analysis include, for example, trends in city-size distributions. Is the crossroads hamlet or the small town losing its functions and becoming obsolete, or is its place in the spatial order becoming more important? What size city or town is the best location for some specific kind of business or public facility? What services and facilities are available only in middle-sized and larger cities, or only in the largest metropolitan centers? In the planned developed or underdeveloped region, what size distribution and location pattern of cities would be most appropriate? Any principles or insights that can help answer such questions or expose the nature of their complexity are obviously useful to a wide range of individuals.

Chapter 9 deals with regions of various types in terms of their structure and functions. In particular, it concerns the internal economic ties or "linkages" among activities and interests that give a region organic entity and make it a useful unit for description, analysis, administration, planning, and policy.

After an understanding of the nature of regions is developed in Chapter 9, our attention turns to growth and change and to the usefulness and desirability of locational changes, as distinct from rationalizations of observed behavior or patterns. Chapter 10 deals specifically with people and their personal locational preferences; it is a necessary prelude to the consideration of regional and urban development and policy that follows. Migration is the central topic, since people most clearly express their locational likes and dislikes by moving. Some insight into the factors that determine who moves where, and when, is needed by anyone trying to foresee population changes (such as regional and community planners and developers, utility companies, and the like). This insight is even more important in connection with framing public policies aimed at relieving regional or local poverty and unemployment.

Chapters 11 and 12, dealing with regional development and related policy issues, are concerned wit the region as a whole plus a still higher level of concern; namely, the national interest in the welfare and growth of the nation's constituent regions. Chapter 11, building on the concepts of regional structure developed in Chapter 9, concentrates on the process and causes of regional growth and change. Viewing the region as a live organism, we develop a basic understanding of its anatomy and physiology. Chapter 12 proposes appropriate objectives for regional development (involving, that is, the definition of regional economic "health"). It analyzes the economic ills to which regions are heir (pathology) and ventures to assess the merits of various kinds of policy to help distressed regions (therapeutics).

Throughout this text, evidence of the special significance of the "urban" region will be found. Discussions of economies associated with the spatial concentration of activity, land use, and regional development and policy have important urban dimensions. It is fitting, the, that the last chapter of the text, Chapter 13, focuses on some major present-day urban problems and possible curative or palliative measures. Attention is given to four areas of concern (downtown blight, poverty, urban transport, and urban fiscal distress) in which spatial economic relationships are particularly important and the relevance of our specialized approach is therefore strong.

It is hoped that this discussion has served to create an awareness of some basic factors governing the spatial distribution of economic activity and their importance in a larger setting. The course of study on which we are about to embark will introduce a framework for understanding the mechanisms by which these factors have effect. It holds out the prospect of developing perspective on associated problems and a basis for the analysis of those problems and their consequences.


Martin Beckmann, Location Theory (New York: Random House, 1968).

Edgar M. Hoover, "Spatial Economics: Partial Equilibrium Approach," in Encyclopedia of the Social Sciences (New York: Macmillan, 1968).

Walter Isard, Location and Space-Economy (Cambridge, Mass.: The MIT Press, 1956).

August Lösch, Die räumliche Ordnung der Wirtschaft (Jena: Gustav Fischer, 1940; 2nd ed., 1944); W. H. Woglom (tr.), The Economics of Location (New Haven, Conn.: Yale University Press, 1954).

Leon Moses, "Spatial Economics: General Equilibrium Approach," in Encyclopedia of the Social Sciences (New York: Macmillan, 1968).

Hugh O. Nourse, Regional Economics (New York: McGraw-Hill, 1968).

Harry W. Richardson, "The State of Regional Economics," International Regional Science Review, 3, 1 (Fall 1978), 1-48.

Harry W. Richardson, Regional Economics (Urbana, Ill.: University of Illinois Press, 1979).


1. A point of departure for Lösch's work was that of a predecessor, the geographer Walter Christaller, whose studies were more empirically oriented.

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