What is an agglomeration economy? How does it affect the growth of a city?

Agglomeration economies are the benefits that come when firms and people locate near one another together in cities and industrial clusters. These benefi ts all ultimately come from transport costs savings: the only real difference between a nearby fi rm and one across the continent is that it is easier to connect with a neighbor. Of course, transportation costs must be interpreted broadly, and they include the difficulties in exchanging goods, people, and ideas. The connection between agglomeration economies and transport costs would seem to suggest that agglomerations should become less important, as transportation and communication costs have fallen. Yet, a central paradox of our time is that in cities, industrial agglomerations remain remarkably vital, despite ever easier movement of goods and knowledge across space.

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