On the Economic Impact of Political Boundaries Over a Resource-Diversified Territory

Geographical space matters for economics in at least two fundamental ways. First, space is a factor of production and a consumption good. Second, it separates economic agents, thereby imposing constraints on their interaction. For example, an urban economic model contains both: residential land is a good while urban transportation must be used to overcome the friction of distance. A third way in which space matters arises in the context of public economics. There, introducing geographical space generates interaction between private and local public sectors which can be affected by the way political jurisdictions are drawn. For example, in economies with public goods, the location of a political boundary determines the very nature of spillovers and thus affects public policy. At a more basic level, drawing political boundaries over a resource-diversified territory can determine jurisdictions with unequal resource endowments and production capabilities. It follows that a political boundary creates public wealth inequalities which may affect the distribution of welfare over the land. For example, the recent split of the former Soviet Union into smaller political entities will sharpen wealth inequalities. In the opposite direction, Western Europe has moved a long way towards removing political boundaries.