The Cautious Farmer and the Local Market
In market formation, risk-averse individuals choose larger markets to reduce price or liquidity risk. In a spatial economy, larger markets mean the marginal participant incurs added shipping costs. In this sense, the scale of the market may be limited by the tradeoff between the benefits and costs of participation. Model 9A assumes shipping costs are zero—absent a cost disadvantage, the firm (a farm here) is ever better off the larger the market. In Models 9B and 9C, nonzero shipping costs may limit size of market for a marginal participant. However, what about spatial equilibrium? If some farms are close to the market and others further away, there will be an incentive for farms at greater distance to relocate nearer the market. Model 9B assumes that farms reach spatial equilibrium by forming a cooperative in which members share the aggregate cost of shipping equally. Alternatively, Model 9C assumes that farms reach spatial equilibrium by bidding up the price (rent) for land at advantageous locations. Chapter 9 is the first in this book to look at firms as both producers and consumers. As we progress toward a model of location that characterizes the regional economy, it is important to integrate demand and supply. In Chapter 7, we began to think about the nature of a firm. There is a parallel here in the contrast between Models 9B and 9C. Model 9B redefines the nature of a firm because the cooperative internalizes a market transaction (for shipping) in the same way that a firm internalizes when it does some aspect of repair production in-house. This chapter therefore looks at how another aspect of localization (market organization) and price are jointly determined.