One of the major subfields of urban economics, economies of agglomeration (or agglomeration effects), explains, in broad terms, how urban agglomeration occurs in locations where cost savings can naturally arise.[1] This term is most often discussed in terms of economic firm productivity. However, agglomeration effects also explain some social phenomena, such as large proportions of the population being clustered in cities and major urban centers.[2] Similar to economies of scale, the costs and benefits of agglomerating increase the larger the agglomerated urban cluster becomes.[3][4] Several prominent examples of where agglomeration has brought together firms of a specific industry are: Silicon Valley and Los Angeles being hubs of technology and entertainment, respectively, in California, United States; and London, United Kingdom, being a hub of finance.[1]
Economies of agglomeration have some advantages. As more firms in related fields of business cluster together, their costs of production tend to decline significantly (firms have multiple competing multiple suppliers; greater specialization and division of labor result). Even when competing firms in the same sector cluster, there may be advantages because the cluster attracts more suppliers and customers than a single firm could achieve alone. Cities form and grow to exploit economies of agglomeration.
Diseconomies of agglomeration are the opposite. For example, spatially concentrated growth in automobile-oriented fields may create problems of crowding and traffic congestion. The tension between economies and diseconomies allows cities to grow but keeps them from becoming too large.
At the foundational level, proximity—especially to other facilities and suppliers – is a driving force behind economic growth and is one explanation for why agglomeration effects are so evident in major urban centers.[2][5] While the concentration of economic activity in cities has a positive effect on their development and growth, cities, in turn, help foster economic activity by accommodating population growth, driving wage increases, and facilitating technological change.[6]
^Beckmann, Martin J (1995). "Economic Growth in a Central Place System". In Giersch, Herbet (ed.). Urban Agglomeration and Economic Growth. Publications of the Egon-Sohmen-Foundation. pp. 107–115. doi:10.1007/978-3-642-79397-4_4. ISBN978-3-642-79399-8 – via SpringerLink.
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