Due to the heterogeneous spatial economy the ratio between freight costs and total production costs varies widely between locations. Transportation costs have a direct impact on production costs. They lead to an spatial differentiation of the production structure. While producers of consumer goods settle down near the market, raw material oriented industries have a tendency to be dispersed.
A new road will have far reaching impacts on the whole system of interaction. Land use pattern along the road may change, villages may settle down along the road due to the increased accessibility and the market areas increase with positive effects on production costs by the realisation of economies of scale. Consumer preferences in a spatial system are not only guided by the variety, quality and price of goods and services but also by the transportation efforts for obtaining certain goods and services. It is obvious that a new road increases the service area.
The improved or the extended road system make new crops economically viable, links agricultural production areas with crop collection and distribution centres. Increased interaction allows the diffusion of innovations and creates competition with other regions. All these cascade effects within and between spatial units cannot be left to the forces of the free-market system and planners and policy makers must be concerned with these interactions. Defining the interactions between the rural-urban linkages also helps produce options for investment in infrastructure, for opening up new areas for investment. The public sector investment “leads” private sector investment decisions.