Using appropriate examples, describe what is meant by institutional factors and explain how social cost can be included in the least-cost equation to determine the optimal location for a new factory.
"Traditionally, geographers have considered factors such as proximity to raw materials, labor, energy supply, and the markets to determine the least-cost location for a factory. Now, the emphasis is changing towards institutional factors, and the social costs of industrial location." Using appropriate examples, describe what is meant by institutional factors and explain how social cost can be included in the least-cost equation to determine the optimal location for a new factory. Industrial location is product of a complex and dynamic combination of many factors. An entrepreneur has to consider a number of variables before making his final decision-making processes. Generally speaking, the ultimate aim of the entrepreneur is to maximize their profits or minimize their costs, though behavioral factors are sometimes taken into account. In recent years, institutional factors and social cost of industrial location become more and more important.
Institutional factors also known as government policies or "Carrot and Stick" policy. Government many encourage or discourage the industrial growth in various areas for different purposes, in order to reduce regional disparities in economic growth, levels of employment and income, and so on.Government can achieve such purposes by introducing zoning laws or policy such as setting up Enterprise Zone. Besides, she can set up regulations to control the working hours and the benefits of the labor, and control the extraction and exploitation of mineral resources.As to encourage industrial growth, government can develop transport system and infrastructure, provide incentives like grants, ...
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Institutional factors also known as government policies or "Carrot and Stick" policy. Government many encourage or discourage the industrial growth in various areas for different purposes, in order to reduce regional disparities in economic growth, levels of employment and income, and so on.Government can achieve such purposes by introducing zoning laws or policy such as setting up Enterprise Zone. Besides, she can set up regulations to control the working hours and the benefits of the labor, and control the extraction and exploitation of mineral resources.As to encourage industrial growth, government can develop transport system and infrastructure, provide incentives like grants, subsidies, cheaper rent for industrialists to develop industries in certain regions and capital allowance. Economically, she can impose protective tariffs and quotas on imported goods to protect the home industries, use price control, give tan concessions and lower freight charges for local manufactured goods.In order to discourage firms from locating in crowded areas, decentralization policy can be introduced. Controlling the outflow and inflow of capital investment can help to attract foreign investment. Government can also set up industrial estates in area of high unemployment, help firms to join in the international organizations and reach international trade agreement with other countries. On the other hand, the direct role of the government includes communications, government spending, legal formation, utilities, education facilities and commercial framework.Policies of various state governments have been one of the significant factors influencing the recent decentralization of the Australian steel industry. The location of both the new steel plants at Whyala and Kwinana can be attributed largely to the pressure exerted upon the company by the government of South Australia and Western Australia. Both governments threatened to curtail the company's ore supplies by withholding the renewal of leases or refusing to grant mining licenses unless the company agreed to construct new steel plants within the two states. These governments have thus obviously appreciated the essential role of the iron and steel industry in attracting other user-industries by- products industries, and associated service industries.Another example of government influence may yet emerge from the recent negotiations between the company and the Victorian government regarding the possible establishment of giant steel works at Westernport, near Melbourne. By offering cheap land, reduced power and freight rates, constructing wharf facilities, and building housing estate nearby, it is possible that the Victorian government may attract a steel complex to that state in much the same way as the South Australia government has at Whyyalla. From the above examples, it is obvious that the institutional factor has been particularly important in the location of the newer steel works in Australia. Social cost measures the values of the highest-valued alternative uses of the resources available to the whole society. It is equal to the private cost plus the harmful effects done to others. Apart from transport cost, labor costs and agglomeration economies, manufactures seek the least cost location also in response to social cost. Traffic congestion, smoke, grime, waste and unpleasant odours emitted by factories are the examples of social cost.Assume that there is an iron and steel industry located in Tsuen Wan. It creates noise during working hours. As a result, the factory will need to pay external cost for compensation if there are complains about the noise. In this case, social cost will be taken account to determine the optimal location, and the compensation will be regarded as the cost of production. In other words, social costs also included in the least-cost equation.Mainly due to constant changes in the world economy, the validity of both "least cost" and "profit maximization" has come under question. Nowadays, institutional factors and social cost are more emphasized. As many industries are becoming increasingly footloose, the location decision is very much influenced by the behavioral of the decision-maker.
