Where should a factory go? In 1909 the German economist Alfred Weber, in Theory of the Location of Industries, argued that firms choose the place where their total costs are lowest. Like von Thünen, he started from transport costs.
Key idea
Least cost theory: a factory locates where transport, labor and agglomeration costs are lowest. Transport matters most. In a bulk-reducing (weight-losing) industry, the product weighs less than its inputs, so the factory locates near the raw materials. In a bulk-gaining (weight-gaining) industry, the product weighs more than its inputs, so the factory locates near the market.
Why it works
Shipping costs depend on weight times distance. If 100 tons of copper ore make 2 tons of copper, it is far cheaper to smelt near the mine and ship 2 tons than to ship 100 tons of rock. A soft-drink bottler adds heavy water, which is available almost everywhere, to small amounts of syrup, so it ships light syrup and bottles near its customers. Weber added two more pulls: cheap labor can be worth a longer haul, and agglomeration (firms clustering to share workers, suppliers and ideas) can lower costs too.
Worked example: Near the mine or near the market?
A sawmill turns logs into lumber, losing bark, sawdust and scraps. Where should it locate?
- The product (lumber) weighs less than the input (logs).
- That makes it bulk-reducing.
- Ship the lighter product the long way: build near the forest.
Answer: Near the forest (the raw material).
Worked example: Compare two sites
A plant uses 50 tons of ore to make 10 tons of product. Site A is at the mine, 200 km from the market. Site B is at the market, 200 km from the mine. Shipping costs 1 per ton per km. Which site is cheaper?
- Site A ships the product: $10 \times 200 \times 1 = 2{,}000$.
- Site B ships the ore: $50 \times 200 \times 1 = 10{,}000$.
- Site A costs less.
Answer: Site A, at the mine (2,000 versus 10,000).
Common mistake
Mixing up bulk-reducing and bulk-gaining. If the product weighs less than its inputs (copper ore to copper), build near the mine; if it weighs more (bottling soda), build near customers. Ask: "Which end of the trip carries less weight?" Ship that.
Weber's model was built for heavy industry and costly transport. Today, cheap container shipping, just-in-time delivery and the value of skilled workers change the balance, but the weight logic still explains many smelters, sawmills and bottling plants.