The paper analyses the effects of introducing taxes and regional transfers on the equilibrium
properties in a standard Core-Periphery model. A central government levies taxes on production
factors and redistributes the revenue to all agents regardless of their location. In the case
of Core-Periphery economy this is in effect a re-allocation of agglomeration rents. Simulations
show that taxes and transfers alter the Core-Periphery model’s properties by moving the Break
and Sustain points. The range of freeness of trade with Core-Periphery outcomes is reduced
for transfers to the periphery, and increased for transfers to the core. The width of the overlap
where the models exhibit hysteresis effects remains the same regardless of the transfers. The
analysis reveals that in the Core-Periphery outcome the agglomeration rents can be taxed without
exhausting the core’s scale effects. The tax revenues can then be redistributed such that
periphery regions and the central government have incentives in promoting core regions, which
function as industrial locomotives for the whole economy
