This paper analyses geographical concentration using the continuum-of-goods trade model in the presence of labor migration, Ricardian comparative advantage and Marshallian-type external increasing returns to scale. The findings show that higher transportation costs lead to concentration in one region, and lower transportation costs lead to diversification between the regions. For intermediate transportation costs, asymmetric diversification becomes a stable equilibrium in which the smaller population region has higher wage rates and a smaller externality, and vice versa. However, because the asymmetric equilibrium is an inefficient outcome, it leaves room for government intervention.
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