• division of labor:  from (a) self-sufficient subsistence to (b) specialization and market exchange, which is easier with proximity of the specialized actors and producers
• provision of physical infrastructure (transport rights-of-way, utilities) at lower cost when the users are close together
• information exchange:  proximity was necessary before the telegraph;  proximity still assists the transfer of subtle information, such as attitude

externalities:  benefits or costs of a firm’s actions that are not captured or borne by the firm that is responsible for them
(See Hanink, pp.119-22;  S&deS, pp.279-82)

positive externalities of urbanization ("urbanization economies" in Hanink, pp.313-4)

• shared labor force
• specialized labor force
• specialized services
• shared infrastructure
• easier flow of information

• land costs, leading to higher cost of living, leading to higher wages
• congestion, leading to higher costs of transportation (esp. in terms of time)
• pollution (would exist anywhere, but density reduces the natural environment’s ability to dissipate pollutants)
• resource depletion, because of the intensity of resource use (link to brief article on Mexico City)

INTERNAL  VERSUS  EXTERNAL  ECONOMIES

Internal economies of scale:  reductions in unit costs of production as a result of larger designed scale of output within the firm;  note that this entails a shift (downward) of a given marginal-cost curve (supply curve), rather than a movement along the same (short-run) marginal-cost curve;  note that this is a benefit to the firm based on actions of the firm

Sources (the first two are the most important, because they rely on designed capacity, rather than short-run increases in output):

• specialized machinery, leading to greater capital and labor productivity
• finer division of labor, leading to greater labor productivity
• spread of fixed costs over greater output (management, research)
• purchasing power
• (monopoly power is usually considered separately, not as a production issue)

(a)  external economies of urbanization:  agglomeration economies based on location in an urban area

Sources:
see the external economies and diseconomies of cities, above

(b)  external economies of localization:  agglomeration economies based on the proximity of similar producers

Sources:

• specialized labor force
• transfer of specialized information (often through the labor force)
• joint support of specialized services
• political clout