Motor City Stories: Brian Palmer has a nice summary of the reasons behind the concentration of car companies in Michigan… historical accident perpetuated by agglomeration economies. What he doesn’t say is that there is a close relationship between such stories and the case for the auto bailout. Agglomeration economies exist because… the network of suppliers, the skills, the interchange of knowledge supported by a geographical industry concentration in turn gives firms in that industry concentration an advantage…. Now, the existence of important agglomeration economies immediately implies that there are social consequences to the success or failure of an individual firm that aren’t captured by the profit and loss statement of that firm alone. Let General Motors fail, and the resulting collapse of its suppliers will hurt other firms too, possibly driving them out of business too. You don’t want to overuse this sort of argument…. But it was surely a major consideration for the auto bailout — and a reason why hard-line opposition to any such action was bad economics.