Innovations that reduce costs of transport from rural locations may also reduce transport costs to rural areas. As transport costs fall, producers can afford to concentrate and achieve economics of scale. This paper explains an initially negative, but ultimately positive, relationship between reductions in transport costs and rural development. A two-region general equilibrium model with firm and worker spatial mobility highlights the firm and household location implications of costly transport-service use by both industry and agriculture in the context of scale economics and product differentiation. The computable general equilibrium model is initialised and verified with a bi-regional social accounting matrix and then used for simulations. Changes in relative transport costs are shown to affect relative regional wave rates, thus also determining the location of "production-cost-oriented" firms. (A)
Abstract