An Introduction to Quantitative Spatial Economics

Homo Economicus

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An Introduction to Quantitative Spatial Economics<br>And why we should spend more on highways

Nicholas Decker<br>Jun 07, 2026

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The study of trade has traditionally constrained itself to highly abstracted and aggregated trade flows between countries, but there is no a priori reason why this should be the case. The same analytical tools needed to study the movement of goods across country borders can also be applied to state borders, to counties, or even to city blocks. Doing so allows us to answer questions of astonishing specificity – we can simulate the impact of new transit links, evaluate how much to spend on highways, or find the optimal network of roads – but it is only in the past few years that we have begun to do so.<br>This article will teach you urban economics from the beginning to the very cutting edge. We will first cover the foundational models of spatial general equilibrium, then show how developments first developed for the study of international trade gave them empirical relevance. We shall then take a tour of all the wonderful things you can do with quantitative spatial equilibrium models, and conclude with what policy lessons they have for us. In particular, I believe that we should spend more on all forms of transport infrastructure, including and particularly highway infrastructure.

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The first model of economic activity in space is that of Heinrich von Thunen’s, way back in 1826. In Paul Samuelson’s view, von Thunen’s “The Isolated State” was a tremendous achievement – containing the first articulation of a general equilibrium model, the birth of marginalism, and much modern trade theory – and places him in the “inner ring of Valhalla” alongside Walras, Mill, and Smith. Mr. von Thunen was an autodidact, who worked out his ideas over many decades while working as manager of land in Mecklenburg. Much of the book is concerned with practical matters of cultivation, and his better remembered theoretical contributions to economics were made in the effort of making actual empirical predictions. Nevertheless, we shall skip those. (I say this only to note that I came away extremely impressed with his work while doing research for this post). While he was one of the first to use calculus to derive equilibrium (the first?), its essentials can be understood without algebraic encumbrances.

Imagine a town upon a flat, featureless plain (or perhaps plane). Farmland extends in a circle around the town, allowing us to only care about one measure of distance, and can be used to produce grain. Meanwhile, in the town, people may produce cloth. Everyone has identical, homothetic tastes for grain and cloth – for simplicity’s sake, each person prefers half grain and half cloth. People may locate themselves wherever they may. Grain is produced as a function of land and labor, with decreasing marginal returns – each additional person on a plot produces less grain than the person added before him. Finally, trade is costly and is a linear function of distance. (Samuelson notes that this prefigures his device of iceberg trade costs, by imagining that the oxen eat the grain which they are being used to transport).<br>So that is the setup. This delivers a striking prediction – in equilibrium, the marginal utility of living in any given place must equal that of every other place. The further outside the town you get, the more expensive cloth becomes. To live out there, one must have a higher wage in grain. To get such a wage, the population has to be correspondingly thinner. In the limit, the rent falls to nothing, and there are no people. Further, and remarkably, prices, wages, rents, and population densities are all uniquely determined by the ratio of grain to cloth inside the town.<br>You can extend this by having multiple types of crops. For example, you might have vegetables that can be grown for personal consumption, or transported at a much higher cost. The only place where they can be economically grown as the only good is close to the town, where they are traded for cloth on the one hand and grain on the other. Further away from the city, we have a region of grain and vegetables. We must be precise about the production technology – to get the specialization we intuitively expect we would have needed to say something earlier in the model – but you get something which broadly matches the use of agricultural land around a city, especially in pre-modern times.<br>Later models of the city keep the circular setup. In the Alonso-Muth-Mills model, production occurs only in the center. The question is where people reside, and how large their residences are. The same basic principles apply – all people commute to the center, paying a linear cost to do so, and so in order to balance the marginal utilities across all places, the price of housing must decrease as you get further away. When we extend it to different types of...