Economies of scale and industrial location

Cigno A. (1971) Economies of scale and industrial location, Reg. Studies 5, 295–301. This paper examines the way in which economies and diseconomies of scale are related to the choice of industrial location, and proposes a simple operational model for simultaneously determining the optimum number, capacities and locations of plants, given the sources of raw materials and the outlets of the final products. An empirical application to the milk processing industry of an Italian region is reported in the last section of the paper. The model is in linear programming form, and is based on the simple assumption that unit plant costs decline as the scale of production is increased, while unit transportation costs increase with distance. The empirical part of the study shows that, up to a point, the average total cost falls as the size of the plants is increased, because the saving in plant costs more than compensates the rise in the cost of collecting raw materials from, and distributing the products to a wider area. Beyond that critical plant size transportation costs rise very steeply and so does the average total cost.