Social optimality in the constructed‐capital model

In the constructed‐capital model, the steady state is derived under the assumption that each individual behaves optimally. Contrasting to this decentralized approach, in this paper we derive the first‐best outcome a central planner would choose. The results show that agglomeration is socially not optimal, irrespective of the level of trade barriers. Furthermore, the differences in the explicit solutions of both approaches are highlighted.