Effects of Regional Agglomeration of Salmon. Aquaculture on Production Costs

During the last decade empirical evidence of regional agglomeration economies has emerged for some industries. This report argues that externalities from agglomeration are not only present in some manufacturing and service sectors, but can also occur in primary industries such as aquaculture. Econometric analyses in this literature have primarily estimated production functions on aggregated industry data. Here, cost functions are estimated on firm level observations of Norwegian salmon aquaculture farms. This approach provides us with measures of the cost savings due to agglomeration externalities. Furthermore, we avoid aggregation biases and can test a richer set of hypotheses on how these externalities affect the structure of costs. According to the econometric estimates there are significant cost savings associated with localization in regions with a large salmon aquaculture industry, suggesting the presence of positive agglomeration externalities. The econometric results imply that there are significant welfare gains to be made from changes in the government regulation of the industry.