Urban Economics Summary (rt).docx

Chapter 6: Theoretical Analysis of Urban Structure (1) Introduction 1. Why are downtown area used more intensively than suburban areas? Why are certain goods and services produced in downtown areas and others in the suburbs? Why is it important that downtown locations permit the substitution of capital and labor for land? 2. This chapter presents the basic ingredients for urban structure and gross spatial patterns of urban areas. The next chapter sees how well the facts fit the theory presented in this chapter. Urban Area with a Single Industry 1. Suppose a region possesses a comparative advantage in the production of a single commodity that is produced for export (economic base). 2. Production is as close to the point of shipping (railhead or port) as possible in order to economize on transportation costs. (Distribution cost to the railhead and assembly costs from the railhead will increase with the distance from the shipping point.) 3. A space of u miles from the point of export results in potential production sites within a geographic area that produces goods that must be transported to the point of export for all shipping. 4. Assume that labor costs are uniform throughout the area. (This assumption will change with the location of households that will be considered later on.) Also, assume constant returns to scale but with a production function that allows substitution between capital and land in order to produce a given output. 5. Although capital can be substituted for land, there is diminishing returns to the use of additional capital with a fixed amount of land. This is because of the need for stronger walls or offsets, heavier foundation, and space for elevators and stairs that caused output per square foot to decrease as the number of floors increases. 6. Assume input and output markets are perfectly competitive so that their prices are given to the firm. 7. Finally, assume that shipment costs are linearly related to distance, independent of the place of origin or distance traveled. 8. The dependent variables in the model are the amounts of capital employed on different plots of land, the rental rates of the various plots of land, and the total output and price of the commodity. 9. In equilibrium, the value of marginal product of capital will equal the cost of capital (interest rate); and the value of marginal product of land will equal its rent. In each case the value of marginal product is the marginal physical product multiplied by the net price = price - t u (where t is the unit-mile transport cost to the point of shipment and u is the miles shipped) The Bid Rent Curve 1. The bid-rent curve is the rent that producers will pay at alternative locations. The highest rent will take place when the distance traveled, u, is the lowest. However, with the higher rent, employers will substitute capital for land.

2. The net profit to the firm is the same at each location because of competition; but in more distance locations, more of the cost is in the form of transport costs rather than rent. Also, at more distant locations capital will be used less intensively, since less capital will be substituted for land. Implications of the Model 1. All land available within the urban area must be used to produce the commodity. 2. The production function indicates how much of the commodity is produced by land and capital at each distance, u. 3. Overall supply and demand are equal in the urban area, but demand is the sum of local demand plus export demand. 4. Finally, urban areas compete for land versus its next best alternative, say agricultural use. The value of land (rent) that will be paid for transport cost savings is just equal to the marginal productivity of land for urban versus rural use. 5. Note that the model is only applicable for profit maximizers and is unrealistic because it does not consider the cost of labor or the location of households. Households in an Urban Spatial Context 1. The theory of household location is centered on maximization of utility rather than profits. But, it also considers the cost of commuting from distant locations to the CBD, where jobs are located. 2. Housing services are also produced with land, labor, and capital inputs. The construction industry produces housing structures that vary in intensity at different locations based upon the amount of capital inputs substituted for land. 3. In a competitive housing market, rent represents the value of a stream of housing services that households are willing to pay. The bid-rent curve will be the highest when transportation costs savings are maximized and will decline to zero at the edge of the city.

4. At the edge of the city agricultural use outbids urban access to the CBD as the most productive use of land. 5. The housing market may not be perfectly competitive due to racial discrimination and tax advantages. Also, market imperfections occur because of neighborhood externalities and interdependencies in the value of land due to the proximity of neighbors. Assumptions of the Model 1. The theory of household choice is based upon utility theory that introduces the subjective cost of commuting (time, fatigue, strain, boredom) along with other characteristic of housing and non housing services. 2. Households maximize their satisfaction with respect to the consumption of housing, goods, and commuting, subject to a budget constraint (cannot exceed total income).

3. Tradeoffs occur because the value of housing services (rent) is high near the CBD but commuting costs are low. The land-rent function will be nonlinear because of the substitution of capital for land nearer the center of the city. 4. The consumer model has two very realistic implications. First, suburbanites consume more housing than residents close to the urban center. Second, because land is cheaper relative to other housing inputs in the suburbs than it is close to the urban center, suburban housing uses lower capital to land ratios than does housing close to the urban center. Several Urban Sectors 1. Each economic activity has a bid-rent curve (rent-offer curve), the slope of which is determined by the importance of transportation cost savings at more central locations and the abilility or inability to substitute for transport costs. 2. In equilibrium, "excess" profit will be zero for each bidder, when the rent actually paid is indicated by the higher of alternative rent-offer functions, i.e. the "envelope" of the rent-offer curves. 3. It is conceivable that rent offer curves could intersect more than once, especially for commercial versus relatively flat residential uses. Households and Production Sectors 1. While there is only one zero profit function for business firms, there are numerous constant utility curves for households. Each rent-offer curve exists for each utility level, based upon the combination or "bundle" of goods and services offered. 2. The lower the rent-offer curve the higher the utility level since paying less for land rent leaves more money to spend on housing services or other goods and services. 3. Which rent-offer curve is relevant? The relevant curve is the one that equates supply and demand for labor provided by these households. Supply and demand determines the wage rate received by area workers. If labor demand exceeds supply, the new workers will be attracted into the area resulting in a higher rent-offer curve, and lower utility by existing workers, until labor supply equals labor demand. Firm and Household Location with Decentralized Employment 1. Firms seek access to the CBD for two reasons: First, they area able to lower transport cost associated with the CBD export facility. Second, they are able to achieve agglomeration economies. 2. More distant locations provide the firm with two alternative advantages. First, they face lower land rents. Second, they are able to pay lower wages. 3. Intermediate locations involve a tradeoff between these benefits for CBD versus more distant locations. 4. Although households may benefit from more proximate work locations, they can expect to receive lower wages, even though their net wages (after commuter costs) remain the same. The reason is that at the same wage rate, workers would prefer to work in suburban locations; hence, the greater relative labor supply would force wages down in the suburbs and up in the CBD for the same occupation. 5. More proximate work locations would not affect the rent-offer curve of households unless the aggregate demand and supply of labor changed in the area.

Equilibrium with Other Cities: the Open-City Model 1. Interurban migration from other cities has been used to equate the local demand and supply of labor in order to identify a given household rent-offer curve. 2. Interurban migration from urban area B to urban area A considers any wage, rent, and communting differences that may exist between the two areas. 3. An important prediction emerges from the open-city model: wages vary among urban areas as compensation for differences in land rent, commuting costs, and other amenities. Forces Affecting Changes in Rent Gradients 1. An increase in population growth will shift the rent gradient upward, reflecting higher transport costs at every location and greater benefits from agglomeration in the CBD. 2. An reduction in transport costs will flatten the rent gradient (substitution effect) and shift the rent gradient upward (income effect). However, the net effect will be a flatter rent gradient and lower rent in the CBD, although higher in the suburbs. 3. A change in income will flatten the rent gradient if the income elasticity of the demand for space is greater than the income elasticity of the demand for transport cost savings. Also, with higher income, the fixed cost of commuting is a smaller percentage of total income, which may lower the income barrier to commuting by upper income groups. 4. Agglomeration economies in the suburbs result in other peaks and mountains that affect the general shape of the rent gradient originating in the CBD.

Chapter 7: A Critical Examination of the Monocentric Model (1) 1. To examine the monocentric model's predictions as compared with evidence. 2. To examine some of the model's specific assumptions and ask whether more realistic assumptions might lead to different results. Statistical Evidence 1. If a monocentric model holds then rent, population density, and/or wage gradients are expected to follow a negative exponential function: ln X(u) = ln Xo - r u where u is distance from the CBD in miles and r is the percentage rate of decrease per mile. 2. Xo represents the level of rent at the CBD, r is an estimate of the slope of the function. The R-squared of the model determines the "goodness of fit" of the monocentric model. 3. Muth's estimate of residential density shows that the rent gradient is getting flatter and the R-squared is decreasing. This shows that transportation costs savings and the increase in income is flattening the monocentric density gradient. Also, the development of agglomeration economies in outlying areas in resulting in a multinuclear city form. Housing-Price Gradient 1. The price of housing depends upon many factors, such as property taxes, school quality, air quality, etc. in addition to transportation cost savings. Hence, the price gradient is often upward sloping rather than downward sloping as predicted by the influence of location alone. 2. Population and housing prices vary because of the intensity of land use for housing and the number of persons per household, that increases closer to the CBD. Wage Gradients 1. Wage gradients decline about 1 percent per mile from the CBD, due to the need to pay higher wages to compensate for commuter costs. 2. Among different cities, higher CBD densities are associated with higher wages because of the need to compensate for higher commuter costs. An increase in population density for a given population results in a wage reduction because of the resulting smaller radius of the city and, hence, the shorter commute of workers living on the edge. Commuting Patterns 1. The monocentric model predicts that commuting will always be from the suburbs to the central city. Workers are generally willing to commute because housing (land cost) is cheaper at the home end of the commute or other services prevail in the suburbs. 2. Not all jobs are in the CBD, so that some cross commuting may occur, as well as less need for commuting by suburban dwellers. The decentralization of jobs is a function of lower wages and land costs in the suburbs and technologies that lower transportation and communication costs to businesses.

Land Use Succession 1. The monocentric model predicts that land use will be converted among different uses according to its "highest and best use." However, the rate of land use succession is affected by existing structures. 2. It is more difficult to convert from high density to low density land use than the other way around because the demolition cost of more capital intense structures is higher and the payoff is lower because rents are declining overall. 3. Will housing demand reclaim inner city land? Yes if the transport costs savings more than offsets the differences in other factors that draw households to the suburbs (less crime, parks, schools, cleaner air, etc.) These differences are being offset by inner city neighborhood associations in many cities, as well as public policy regarding housing, crime, education, and job accessibility. Topography and the City's Edge 1. The monocentric circles of land use assume no natural barriers to transportation or existing transport corridors that affect access. This assumption is, of course, unrealistic and will affect the rent gradient. 2. The city's edge is "fuzzy" because of three factors: a. Agricultural productivity, the next best alternative to urban use, varies with respect to productivity. b. Farmland comes on the market a specific times in the lifetime of the farmer, rather than continuously as it become profitable for urban use. (Also, there may be tax advantages or land trusts affecting land availability.) c. Farmers may simply prefer to remain in business rather than sell to urban developers. 3. Speculation may result in parcels of vacant land in urban areas where land is held back until its use is expected to be more profitable. The provision of water, sewer, roads, etc. may effect the future use of these parcels of land. 4. Speculation regarding developed land is also dependent upon the cost of demolition. The cost of demolition can be prohibitive when compared with the value of the cleared land. 5. A strong case can be made for the idea that the operation of land speculators causes developers to make efficient decisions regarded the timing and location of land use based upon the current market value of land versus the present value of its future net benefits. But, the timing of real estate development is a complex and interactive process. 6. Topography affects the monocentric use of land based upon the bedrock (cost of foundations for building) or other natural barriers (lakes, rivers). High rise building need a strong bedrock as a foundation. Otherwise, the skyline will reflect fewer high-rise building than predicted by the rent gradient. (Example of New Orleans). 7. The emergence of agglomeration economies around loops in larger cities will attract CBD activities to outlying areas and result in multinuclear concentrations of land use. 8. Social changes such as the increase in younger two income households is likely to increase the demand for housing in older neighborhoods that are more accessible to the CBD (West University and the Heights in Houston).

Chapt. 11 – Land-use controls and Zoning (1,2)

O’Sullivan Chapter 2: Why Do Cities Exist? (2) 1. Cities persist because the benefits associated with concentrated production more than offset the costs of living in high population density. 2. When would a region have not cities? a. Equal productivity (lack of comparative advantage among regions). b. No economies of scale in production (constant returns to scale). c. No scale economies in transportation (costs per mile independent of amount shipped). 3. Why do trading cities emerge? a. Comparative advantage generates trade and higher production possibility. b. Transportation costs are relatively small, including the opportunity cost of travel time as well as money costs. 4. How do factor cities emerge? a. Economies of scale lower the costs of production, adding to factor specialization and plants larger than the minimum efficient size based on indivisible inputs. b. Economies of scale in production enhance the benefits of lower transportation costs and explain the location of cities at crossroads, ports, river junctions, and other transshipment points. 5. What factors limit city size? a. Transportation costs for given economies of scale. b. The extent of economies of scale for a given demand density. c. Demand density needed to achieve economies of scale. d. Commuting costs of workers on wage rates and opportunity costs of factory goods. (Example, cost of factory shirt versus homemade shirt.) History of Western Civilization Application of four factors that explain why cities exist: 1. 2. 3. 4.

comparative advantage, specialization, and exchange; internal scale economies and effect of larger demand; transportation costs; and agglomeration economies.

The First Cities 1. The first cities served both defensive and religious purposes 2. The defensive city originated to protect stored food surpluses. Economies of scale in food storage protection existed. 3. The religious city developed with economies of scale in temple worship of terrestrial gods rather than earth gods. 4. Defense and religion were complementary services that led to agglomeration economies. Greek Cities. 1. By 500 BC independent city-states ranging in size from a few hundred to tens of thousands. 2. Athens had a population of 150,000 and Sparta a population of 40,000.

3. Athens was a market city that originally depended upon trade but later turned to homage and tribute from lesser cities Roman Cities. 1. Rome had a population of more than 1 million by 3 AD 2. It fed its people from a combination of trade and tribute, with tribute being more important. 3. By neglecting production activity it lost interest in trade routes and eventually declined following German tribe invasions in the 4th and 5th centuries. Feudal Cities 1. Islamic conquest disrupted trade and growth of port cities on the Mediterranean. 2. Marauding barbarians swept across Europe, making trade and travel dangerous 3. The feudal economies of the 11th through 14th century were based on manorial estates and small walled cities. 4. Toward the end of the 14th century small defense cities gradually became market cities. 5. Market cities developed for two reasons: a) Power in the feudal system was decentralized, causing production and exchange to replace tribute and force; and b) agricultural productivity was low and cities were required to compete with homemade products with other cities rather than only for food in its hinterland. 6. Competition among medieval cities caused innovations in production and commerce. Education and literacy developed in cities. 7. The black plague between 1350 and 1450 decreased Europe's population by 1/3 to 1/2 and reduced the growth of cities. Mercantile Cities. 1. In 15th century power transferred from feudal lords to a few monarchs largely because of economies of scale in making war and new defense innovations. (crossbows, muskets, and canons) 2. Long-distance trade developed because of two reasons: a) Safety increased with defense system, and b) Development of ocean travel and exploration opened up new markets. Industrial Revolution 1. In last 2 centuries urbanization has risen exponentially. 2. Agricultural productivity increased with mechanization 3. Manufacturing innovations increased scale economies in production and led to centralization of employment. 4. Intercity transportation allowed regions to exploit their comparative advantage and opened RR cities away from ports. 5. Intracity transportation replaced the "hoof and foot" city and expanded the viable commuting distance and size of a city 6. Structural steel and elevator increase density of land use Urbanization in the United States. 1. Pre depression period of rapid urbanization 2. Decade of great depression 3. Post war period with reversal of MSA v non-MSA growth in the 70s. Why? a. dispersion of manufacturing employment due to intercity transportation;

b. slower decline in farm employment; c. growth in extractive industries; d. growth in retirement and recreation cities; e. population "spillovers." 4. Old versus New Cities in the United States a. The role of the automobile on the form and population density of cities. b. The role of electric power on economies of scale in production. c. The separation of a firm into a “packet of functions” at different locations.

Land Market (2) -

theory: each parcel of land is used by the activity that pays highest rent speculation: some sites are hold off the market in expectation of future higher prices

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reasons for the theory to not be realistic: o government intervenes:  planning controls  close to the city center value is higher  commuting cost decreased  boundary moves outward; land value decreases near city center  wholly demand-determined  not practical  planning controls or zoning regulations o speculation:  owner does not accept actual market price  holding land off the market in anticipation of higher future prices (not necessarily harmful)  speculation: prices are rising  price set by seller is pretty similar but a bit higher to achieve a quick agreement  inertia: falling prices  price set by seller relatively higher  may have to adjust over time  in the inner area sites remain vacant longer because sellers want to get the price they used to get (but due to technical development inner areas drop in prices and outer area increases) o profitability of redevelopment  land use only changes when it is economical to replace the existing building  new building: gross annual return high, maintenance costs low (changes over time)  when costs of maintaining exceeds rent  abandoned o unwillingness to displace  occupiers: familiar and social and economic relationship  value for occupier higher than market value  compensation needed  higher price  more land comes to market (compensation for loss of social relationship)  taxation: owners will sell only if price after tax remains the same as before o ownership/occupation  landlords are more willing to sell then tenants as owner occupiers since landlords do not have a social relationship to site  tenants unwilling to move  landlord tries to obtain higher rents  tenants unwilling to pay higher rents because elsewhere it is cheaper; on the other side prefers to pay higher rent rather than move  price will be determined by political strength  fair rent legislation: rents kept down at level of other sites  lack of security of tenure/willingness to pay higher rents  prices gained same as if landlords were owner occupier  lack of security/unwillingness to pay higher: o compulsory purchase  buyers indifferent in between pieces of land  but: buyers want a certain piece of land (prefer it relative to another, e.g. for railway)  sellers try to obtain extortionate prices  public authorities intervene and make compulsory purchase (compensation required)