The Potential Externalities of Amazon's HQ2

The discussion of externalities in this class reminded me of an issue we discussed in my Urban Economics class: the externalities of Amazon’s HQ2. Specifically, the issue debated is whether cities should bid for large firms or if new firm locations should be chosen by the free market alone.

Believing the costs to outweigh the benefits, many argue that cities should not bid for companies to open new offices in their area. One potential drawback are congestion costs. These negative externalities of production are inconveniences brought about by the firm’s opening. As more and more people move in to work at Amazon’s HQ2, Northern Virginia will likely see a higher cost of housing, greater commuting times, and increased noise pollution. The marginal cost to society will be higher than Amazon’s private cost because the only cost the corporation will face is the cost of opening. While Amazon’s HQ2 will bring in higher paying jobs, many predict that the benefits will occur mainly to the wealthy and educated, while rising housing costs will threaten to displace the middle and lower classes in Northern Virginia. 

However, there is another externality to consider that may suggest “bidding” has a positive role to play. According to Greenstone et al. (2008), a new firm location can create a positive externality of production; the opening of a new firm may raise productivity in nearby firms in similar industries. This effect results from several factors. Multiple firms located together may allow workers from different companies to interact and share knowledge. Additionally, with more of the city’s employees working in the same industry, companies will be able to find a better match for their positions. Following this logic, municipalities should bid for new firm locations when they have preexisting companies that they expect would become more productive. Bidding incentivizes the firm to choose a location that produces the productivity bump over a location that does not and provides a subsidy to the firm for their positive externality. The question remaining is whether it is reasonable to expect other DC area tech companies to experience this productivity gain from Amazon’s arrival.