un | ECONOMIC . ANALYSIS WERNER Z. HIRSCH Professor of Economics University of California, Los Angeles HAZE TATA McGRAW-HILL PUBLISHING COMPANY LTD. New DelhiURBAN ECONOMIC ANALYSIS Copwiht @ 1973 by MeGramti te. ‘Rights Re No part of tha peblcaton may be reproduced sed 9 {ermal ste, o vase In ony fom ory any eas, ‘ect, mechanical photocnyig, eso, ears. ‘whout the por wilte person the pur. ‘he ecton an be exported tor tna oy by the Pubher, {Tate MeGraw- Hi Pabtehng Company Ue Pubusheg by Tata MeGtow Hi Publishing Company Unwed and Ponted by Menon Matjanl at eka eines Pv. Lid, New De -13002CONTENTS List of IMustrations List of Tables Preface CHAPTER 1 INTRGDUCTION . a I. Today’s World—A World of Cities II. What Is a City? IU. Urban Economics IV. Major Components of the Field of Urban Economics CHAPTER 2 INTRODUCTION TO URBAN MICROECONOMIC ANALYSIS T.. Introduction Urban Microeconomic Concerns Economists’ Intercst in Urban Markets and Their Problems IL. Production and Demand in an Urban Environment Production Concerns Production of Information . UL Externalities in an Urban Environment | IV. Tools for Analysis of Spatial Characteristics of Urban Markets The Effects of Distance on Production and Exchange The Effects of Distance on Location V. The Spatial Form of Urban Areas CHAPTER 3 URBAN RESIDENTIAL LAND USE ' AND HOUSING MARKETS I. Urban Housing Conditions, Demand, and Supply Urban Housing Conditions Some Definitions Aggregate Demand and Supply Il. Frameworks and Models of Houschold Residential Location Decisions Land-use Framework: Von Thiinen Tncome-related Framework: Park—Burgess. Budget Constraint Models: Alonso, Muth, and Siegel Modcl Implications for Urban Form and Density Pattern Ill. Market Imperfections and Housing Problems Neighborhood Degradation 4 Housing Segregation IV. Policy Approaches Policies to Combat Neighborhood Degradation, Policies to Combat Racial Housing Segregation _ Urban Spraw] xii xiv XV COUN 13 16 22 26 39 45 45 52 60 69Comets CHAPTER 4 URDAN TRANSPORTATION MARKETS 1. avroduction 1M, Inereations between Transportation and Other Urban Maess ‘Transporlion Reloed to Residential Lend Use and Housing Makes “Trarsparstion Related to Labor Matets “Transportation Related tothe Urbon Goverment Sictor ML Governmental Interest in Urtan Transperaion 90 ‘Reasons for Government Interest Some Theorteal Conlerations IV, Demand for Urban Transportation Services 9s “The Classical Demand Cane “Tine Pcs Welt Contents, Commanty Charcteice Event Cutty ‘Teip Generation ‘Tap Distibuton ‘Modal Choice Ve. Shortnun Supply and Pricing 109 rice Consideration: ‘Transportation Vehicles Pricing Technigues [Nonhighvay Transportation ‘Vi. Tovestment Deeksions snd Long-un Sopply us ‘Margins-cst Pricing Investment Panning ‘Vil. Urban Transportation Policy 125, Cost and Supply Poiies Income Policies CHAPTER S_ URBAN LABOR MARKETS 130 Introduction 130 Hi, National Markets: Labor Demand and Supply 13 IL, Urban Labor Markets 133 ‘Supply Demand AY, Neighterhood Markets us Vi Urban Labor Policy Labor Market Ineficonces Unereployment| Povey Ra2ist DuscrinaionContents ix CHAPTER 6 INTRODUCTION .TO URBAN : - MACROECONOMIC ANALYSIS 173 L__ Introduction 173 Aspects of Urban Macroeconomics Urban Mactoeconomic Indicators Economists’ Concern about Urban Growth (and Decline) II. Some Concepts: Frameworks, Theories, and Models 179 IIL Urban Change Perspectives 182 CHAPTER 7 FRAMEWORKS OF URBAN MACROECONOMIC ANALYSIS 186 |. Introduction ~ - 186 IL. Export-base Frameworks 186 Problems with Export-base Analysis : I. Input-Output Framework 194 The Accounting Description The Theoretical Description Problems of Input-Output Analysis Z IV. Income-expenditure Frameworks 210 Concepts of Area Income and Product - Determinants of Output and Employment Problems of Income Expenditure Frameworks V. Resource-base Frameworks 217 VI. Statistical Urban Macroeconomic Frameworks 221 Single-variable Extrapolation Framework Ratio Extrapolation or Allocation Framework Shift and Shares Frameworks Shift and Shares as a Projection Framework Criticisms of the Shift and Shares Framework Shift and Shares as a Theoretical Framework CHAPTER 8 APPLICATION OF URBAN . MACROECONOMIC FRAMEWORKS eee a I. Introduction : 233 If. Conceptual Issues of Projection, Impact, Planning, and Descriptive Models 233 Projection Models Impact Models Planning Models Descriptive Models Il. Specific Models é ‘ 244 Export-base Analyses Urban Input-Output Analyses5 Contents Tncome-expenditue Forecasting Analyses ‘Shit and Shares Analyses, AW. Policy Aspeets of Urban Growth and Subitiy What Growth and Stability Are Detirable? How to Produce Specie Uibaa Macroeconomic Performance? CHAPTER 9 ECONOMICS OF URBANIZATION T. Tavoduaion 1H. Factors Titiating the Ustonlzation Process —Prereuiies of Urbanisation Comparative Cost Advantage Internal Markst Demand Tereases +The National View IL," Perpetuatig the Urbanization Process IV, Characters of an Beosomy in at Invermedine Stage of, Urbanization "Baty Ttermedist Stage Le Later Intermediate Stage Ye Characteristics of an Advanced Urban Economy Information Prodvation Specialization, Proximity, and Exteratties Production Specialization and Vlnsrabity Growth and Sie Alucne, Arsnites, nd Option Demard Yi. Giy Sases VILL Urbanization Potcy CHAPTER 10 INTRODUCTION TO URBAN PUBLIC SECTOR ANALYSIS 1. Urban Poblie Setar Concerns 1, Missions of Ushan Govenements ML Demand TV. Supply of Urban Government Services Production Coss YY. Decision Makiag VL. Fanding of Urban Pubic Servis VIEL Regulation CHAPTER 11 DIMENSIONS OF URBAN PUDLIC SERVICES 1. troduction Wi. Demand ‘Output Measures Demand Estimation 22 mm ™ 28 23 29 27 2 20 396 309 312 3H 3s 315 a5Contents xi UL. Supply oe 319 Production i Costs : A Model of Scale Economies in Public Services. IV. Decision Making 334 Program Evaluation Interprogram Comparison Intergroup Comparison CHAPTER 12 FOUR MAJOR URBAN PUBLIC SERVICES 348 I. Introduction : 348 IL. Police Protection Services 348 Environment and Goals Demand Supply Seat Decision Making a Police Patrol Services; Apprehension Activities; Traffic Law Enforcement; Motor Vehicle Accident Control Ill. Fire Protection Services 368 Environment and Goals Demand . Supply Decision Making Dispatching Fire-fightine Equipment; Deploying Fire-fighting Units IV. Recreation Services 376 Environment and Goals Demand Supply Decision Making Rooftops as Park Sites; Rooftop Plazas; Vest-pocket Parks V. Cultural Assets and Activities 385 Environment and Goals Performing Arts; Visual (or Fine) Arts Demand Supply Decision Making CHAPTER 13 FINANCE, REGULATION, AND CONTROL 396 I. Introduction : : 396 IL Financing 396 Revenue Sources Fees and User Charges; Property Taxes; Nonproperty Taxes; Grants-in-aida Comers Fiscal Imbalances and Presures ML, The Fie! Pgh of the Cemral Cay «08 ‘Reason forthe Cental Ciy's Fiscal Pgh (Cnt Cier—Havent ofthe Poor, Posed and Orrin [ater Coveramenal Fragman ander Feta 2n ‘Spire: ConmatinSploners gotin Sploer Facl Imerdgerdence Stone Mortons Movonet Eames Pornal Remedies TV. Governmental Intervention as TLand-se Regulation Abating Urbsa Pollution Potten Character: Essig he Sel Coto Potten: Appronies to Cotoing ond Absig) Pio, ‘Municipal Bmployecat Labor Relations YW. Urban Public Policies a ficiency ia Serie Delivery Financing Urban Governments “The Restructring of Goverment in Metepoitan Ares More Systematic Intervention Some Further Thoughs Name Index wo Subject Index 6- LIST OF ILLUSTRATIONS 21 2.2 2.3 24 25 2.6 27 3 3.2 3.3 41 4.2 Sd 52 81 82 91 9.2 121 72.2 Representations of the Conditions of a Threshold Activity -The Weberian Triangle An Isodapane Map with Two Input Locations and One Market Market Area Boundary with Equal Prices Conditions for Hyperbolic Boundaries between Market Areas Equilibrium in Spatial Monopolistic Competition A Schema for Location Equilibrium of Households and Firms Distance Equilibrium for a Household Change in Distance Equilibrium from Income 1 to Income 2 Derivation of Integration-promoting Rent Supplements Determinants of Transportation Demand Traffic Diversion Curve Aggregate Supply Functions of Labor Phillips Curves Flow Chart of Revenue Side Flow Chart of Cost Side~ Urban Characteristics, Urbanizing Factors, and the Urbanization Process Classification of Cities by Growth Stages Police-Crime Relationship Real Expenditure per Concert and Number of Concerts, for a Major Orchestra, 1936-1964 18 34 35 36 37 38 4 56 57 78 98 104 137 163 253 254 275 287 361 393AIST OF TABLES: uw at us 12 73 ou 22 93 101 ud ua Ms Ma us a 12 a na ns ns nz ne no a ‘Types of Anais and Ubon Chargceities a Annin Beneis of Vaslngton's Meteo Spier by 1990 tte Mypoteteal Example of Interndusry and Sze. How donnie 196 Urban Slesinsastey Accetng Framework. 19 Hypothetical Iteindsity and Sector Farw Accounts, ‘tpons and Spore Expicily Included a0 Chatecsinies of Feonomy In Farly Sone of Uibanlartm — 296 Ghatoctesulee of Diferentaine Cit 2s ‘Churseeret of Abvoreed Ulan Eeoromy Bs Mujor Uthan PoblieServiz am Taveationa Production Puntion with Stel Atiodee Mestad lack Male Telesade tudes a 1 ted Maliple Regression Fqstion, Compare Peformance, ‘Geads 6,Teta Tee of Isle Skil, Uibaa Soo Dineen in tev York Site, 57 ms Prewnee or Abente of Economies of Sete n Usban Pubic Services a2 ‘Semmary of Thtee Buse Redsetion Optio, Los Angses Und School Dale, 1967/1968 Mt ‘eoeti-eon Evaluation of Urton Renewal Bee eyreslon Surpmaset of Demands fo Plc Serves i ‘St Lowi for the Yeors 194-1966, Iclelve 256 ‘Arce Prodsevity 5 ‘Summary of Cons nd Dero of Fapetinetal Patch Changer 20 Tienes and Cous of Accident Control Program, 1968-1972 369 ‘rial Diurbuton of Rezrenson Expentore, Berkeley, Cairn 7” CCorsponent of Socio Cons and Deft for Urban eeresnon Projets eo ‘rater Value ofthe Recreation Weneis and Cots of ootop Park at ‘resent Value of User Benes and Contscf Rooftop Piss 383 Nenefie apd Cont of Teo Vert poet Parks a Los a ‘Angess, Calan ‘Financing of Selected Urban Services, 1966-1967 7PREFACE Cities were first created in the ancient Orient to protect man and ad- vance his well-being. The first urbanites hid behind laboriously constructed moats and fortifications and, with their protection, engaged in production and commerce. Under the exuberant Greeks the city evolved into a cul- tural showplace designed to promote the good life. More recently the city has become a melting pot and an efficient information producer, while con- tinuing to be the center of culture, It has been:said that the Lord made the countryside but man built the city, and it is.in the city that man is inventing and developing ncw ways and new objects and services designed to satisfy his needs and desires. In a short time span, however, the American city has become in some respects a jungle, and at times even, on balance, an inefficient producer of goods and services, Long ago Ralph Waldo Emerson had already decided that cities give us collision. Some of this has been to the good. However, in recent years collision has taken the form of riots, policemen’s and garbage collectors’ strikes, and the closing of public schools because of insufficient funds. ‘ ie - Economists have much to contribute to a better understanding of what makes the city tick, of how we can project its future, and of some alterna~ tives that are open for urban public policy and what their main conse- quences are. They did not-seize these opportunities until quite recently, when, in the 1950s, economists began to turn their serious attention to some urban economic issues. This book is built on these efforts. One can approach urban economics from a number of different direc- tions. Two directions have been taken in the past. Onc focuses on impor- tant urban policy issues; the other procecds as if urban economics were a subficld or special case of regional economics; which inquires into where'a given economic activity takes place and why. Thus this second approach focuses on one spatial aspect of economic activity, i.e., distance and loca- tion where economic activity docs or should take place. But spatial.in- quirics can also emphasize nondistance, i.e., proximity and density. Grant- ing that proximity is the inverse of distance, it nevertheless makes a great difference whether, in looking at the urban world, the economist’s principal concern is distance or proximity. Specifically, the economist will seck to develop and apply a.very different type of economic theory if he is distance- oriented from the type he will be promulgating if he is proximity-oriented, particularly if he sees proximity as going hand in hand with great special- ization. I cmphasize.in this volume that the urban cnvironment is generally characterized by high levels of proximity, production specialization, afflu- ence, and technology. Great proximity in cities heightens the probability that a decision by one economic actor will affect the utility or productionPreface xvii in developed: countries. Foreign readers will be alert to their own special conditions and recognize cases where generalization would be hazardous. Mathematical expressions have been kept to a minimum. However, there are a few concepts and methods of analysis—particularly in macroeco- nomicS—where the advantages of using some simple equations appear to outweight the disadvantages. I am very much aware of the unevenness and difference in levels of sophistication with which by necessity different topics had to be treated. This to no small extent reflects the state of the art in this relatively new field. Much remains to be done. To analyze the great urban policy issues of the next’decade, sharper analytical techniques must be developed. It is my hope that some suggestions for the direction of future work have been made in this volume. In writing this book, I have derived much help, stimulation, and intel- lectual pleasure from discussions with a large number of colleagues and students. Foremost among these is Dr. Sidney Sonenblum, without whom the writing of this volume would have been impossible. Many ideas were first tried out on him, and he improved and refined them. As a result, many parts of this book, in particular the presentation of urban macro- economic frameworks and models and the géneral outlook on urban micro- economic analysis, represent close collaborative effort between Sidney Sonenblum and the author; I am most grateful to him. I also owe special appreciation to Jerry St. Dennis, who effectively as- sisted in researching urban macroeconomic models and in helping organize this material; to Robert Butler. who helped in the early stages ot rescarch on labor markets; and to Ronald Teeples, ho made major contributions to the chapter on urban transportation markets. In probing special aspects of urban economics I greatly benefited from helpful discussions with other colleagues at UCLA—Professors Bryan Ellickson, Michael Intriligator, Harald Somers, Donald C. Shoup, and Jefirey I. Chapman. Moreover, I was particularly fortunate in being able to complete the manuscript while spending a semester at Harvard University and the Massachusetts Institute of Technology, where many colleagues, in discussions of issucs, helped mold my ideas. In this connection my appreciation goes to Professors Ken- neth J. Arrow, Martin Feldstein, Robert Dorfman, Richard A. Musgrave, Jerome Rothenberg, and Robert Solow. But J owe no less appreciation to my students, too many to*mention, who participated during the last few, years in a graduate seminar in urban economics at UCLA. Their chal- lenges to both old and newly proposed ideas and concepts were most stimulating. : Special thanks are due to Mr. Lowden Wingo, Jr., and Dr. Sidney Sonenblum for reading the entire manuscript; to Professor Dick Netzer for reading Chapters 1 and 6 through 13; to Professors Richard F, Muth and Hugh O. Nourse for reading Chapters 2 through 6; and to Professor. CHAPTER I INTRODUCTION I, TODAY’S WORLD—A WORLD OF CITIES The growth of the cities has been, and still is, one of the strongest, most inexorable developments of the century. In the 1960s, as in the 1950s, this nation’s large increase in population was concentrated in about one-fourth of the counties, mostly urban; one-half of the other counties in the United States, mostly rural, actually lost inhabitants. These statistics illustrate the continued massive metropolitanization of America; attracted by the oppor- tunities of urban life and repelled by the lack of rural opportunities, Ameri- cans have steadily gravitated from rural areas to the cities and their suburbs. Urban areas thus swallowed up the nation’s entire population increase of 24 million; and by 1970, 149.3 million persons—73.5 percent of the total population (compared with 69.9 percent in 1960)—were liv- ing in cities of 2,500 or more.’ Of the fifty largest SMSAs (standard metropolitan statistical areas), all but one ‘showed substantial growth in the 1960s. However, the suburbs grew much more rapidly than did the central-city cores. Whereas the aggregate growth of the central cities of the nation’s 243 SMSAs was 5.3 percent, that of the suburban rings was 28.3 percent. By 1970, the suburban-population outnumbered that of the cities for the first time—76.3 million versus 63.9 million. These trends are, by and large, duplicated in many of the developed countries of the world, During the 1960s, there was a slight increase in the number of very Jarge cities—Houston, with more than a million population, became the sixth largest city, and the number of cities with between half a million and a million inhabitants increased from sixteen to nineteen. This trend has been accompanied by increased slums and crowding; deteriorating public transportation; sprawling suburbs; swelling welfare costs; increasing alienation, violence, and crime; air and water pollution; and severe fiscal pressures, particularly on the central cities. However, urbanization would not have gone so far but for the posi- tive attributes of urban life. All over the world, people have been moving ‘to the cities for the same reasons: there they can find tremendous oppor- tunities, improved incomes, and diversity of options—many possible em-~ ployers, many possible careers, and many possible forms of cultural experi- ence and life style, Thus the great urban dilemma: It is in the cities that people can find and create opportunities; yet, it is in the cities that the quality of living + Philip M. Hauser, “The Census of 1970," Scientific American, vol. 255 (July 1971), pp. 17-22.2 Widen Eenomi: Ants 1 pernved a dtioratog. And the es that they ‘een aspalon and achievement smstepprets nn ST “The eles are places of pret interdependence, which i ee sore of oppatulys ye, ir very ltercndcce tates tenons of Tterpeacous ridets exremsy dnote, Inthe Unita Stes toe {Beds have witesed tow ulerabe usa resents cn be deerioel soups who teak thle ova abetives. Economics bet mich fo cou {othe ants of urban merdopndeaces and verb Often rc jects are econ inte tenn at rome fon ek to expd ie ‘eoutes en Ivy daar ban areas Sd fo henge te dite: iE ofthe resources amoog erent poops But beyond ta the nt iy tss ot economies are conerand wih scary a lest a, ae they shoud be epled specially tthe modern tan ssc, Ta the Ist 19605, two newly powel groups emerged im Amer ciisa~ite poor an puble enplyeen Tew poop ean bun wih Partial steagh teeause ofthe ieeasinginterdepenczoce a wn Sip of urbanites. The acti of pbs enon ad the por tae used tome dsropins and coninbuied tos teas of aay od fea fn the olier hand, these. gooups hive been insmentt ia conecing Somme ofthe farquies of he pat However, ie petece of pot and ‘ply fl neues contr fo bea sore ol pena ed stk trouble for wich res mest be fovad and apple soo, "Tie end sae res are ube for ara by como. Be fore we stp to develop way to analy them, we mus stem fo d= fine acy and oi out thon aarti which conse th ns of interest of baa eee, M. waar is 4 curv: ‘There isa great temptation to deine acy, urban poliey Ses, oF stan economics very broadly, perhaps too broadly.” For example, on of he tmost seeping dtaitions of the utbar scene was indie provided by President Richard M Naa, who set up an Ustan Afar, Coun is purallt with the wel-eablshed National’ Security Couns, wich dels ‘ith interationa! alae, The eabine-tevel councl was exablished in fonder to give "domestis problems equal tiling with fori afin” Dy so being equated wih Comestc polly ses, uchom poly sues. art given an exsesely broad destin, so comprehensive tit sometines ‘esis ia coaon, i Wit hes, ly? The ar of use any os, ea ‘on one's viewpoint and objective. To the economist, a iy i @ dymame ‘tem of itereclated and interdependent markets characte by eeat 7 ook th ema a and nepal we wed haat. Tuam er Soph ach. Introduction 3 , density and specialization of economic’ actors as well as certain institu- tional conditions that influence decision making by many different govern- ments, each of which has limited authority and competence.‘ These mar- kets serve and are served by large numbers of persons and firms located in relatively close proximity. Cities specialize in efficiently providing house- holds and firms with contacts and flows of information at lower cost than do other spatial forms of social organization. Significant markets in cities include land and housing, labor, trans- portation, and public service markets. These markets are closely interre- lated in a given metropolitan area, and many are also related with simi- Jar markets in other metropolitan areas and the rest of the country. The * latter phenomenon stems from the opennéss of the economy, which does not limit a market to a specified area but offers a felatively free exchange of goods and services within the country. To be a city, a geographic area must have sufficient size and concen- tration of economic activities and households to effect scale economies in its private and public sectors. It is clear that the size and character of the city reflect the size and physical requirements of its major markets, and vice versa. Thus a city must provide working space, transportation, and communication for its industries; it must also provide living space, recrea- tion areas, public utilities, logistic support, protection, and other services for its people. : : Concentration of people and economic activities, a characteristic of Cities, is the direct result of the advantages of close contact—often referred to as “economies of agglomeration.” Such economies are in turn respon- sible for attracting larger and larger agglomerations of people and eco- nomic activity. Distance-related costs of transportation and communication shape a market’s spatial dimensions (i.e., location of enterprises, resi- dences, and transportation arteries, as well as density of enterprises and households); and the spatial dimensions in turn shape transportation and communication. Another characteristic of cities. is production specializa- tion, since producers benefit from the availability of a highly diversified pool of skilled workers, professionals, and entrepreneurs. Because of these resources and the presence of advanced technology and capital intensity, innovation and inventiveness flourish. And large markets ensure scale eco- nomies and a great diversity of goods and services, to the benefit of ur- banites. 7 Another characteristic of cities is the circumstances of governmental decision making, which can be discussed in a broader setting. Although the economist is mainly interested in the workings of the urban markets, he cannot overlook how the markets relate to the governmental, social, and physical aspects of the city. Some of the characteristics of a city, and 4 Jay W. Forrester defines an “urban area (as) . . . a system of interacting industries, housing, and people.” Urban Dynamics (Cambridge, Mass.: MIT. 1969), p. I.Peioeerene peer opeuipes pneu PE Ean ye om eee be ger seo a ates ee Seed a canta: SSNS SSeS Soent es poet ie tag eet ete arene! cts ate puis plan i. city Spe eee ee eee Sete ea A ee Tet eee ee eee ea oe ee eee nose en ea Seat CE a lrmtepeat deci aon ace eee es anes Se ee eee Sm a So ee et See eae etree pee Sry Se wins Pa Se ope a cane ae ey oa Boece mwenpaeecies haere ; EROS St natn ret wa me pins oe casas Soest acetal mem ease Fass Se ey ete ae Bo Pieper prea aid Ce ee ai a ae ce te an go oe na Seder a fe kre ck an pe nt seen Srminice SCS pt eet ey tay RES ep eee Coe ce apa, Fa es ten wie oh the social eatiics of the city. The evils of iavoluntary segregation re by a a sh oul cue wt te trea pepe oe ogre tao, ee wad 8 em, Se ee ee a caciae once ss rg de ofan cana eee Tey es Ply any Spine eae wen cern ha ayn aan ee i ta pt Selon nd es coe sages na Spe a ee aie eee oar Seamer cae aIntroduction 5 Particularly those communities along their boundaries. Members of these distinct neighborhoods are customers of and provide personnel for firms, markets, and governments, most of which are located outside the neigh- borhoods. In terms of physical characteristics, a city is an artifact created by man. To the architect, a city is an inhabited place of some distinct “image- ability.”* The physical image of a city is defined by its complex of build- ings, wires, pipes, roads, and air and water rights and their spatial layout. It is a large, interwoven system that houses and transports people, moves and stores goods and services, and disposes of effluence; many economic features of a city are shaped by this system. In many respects the physical part of a city is a great machine that comes into existence by growth rather than by design. A city grows in response to currently perceived in- adequacies at any point in time, unlike smaller machines the lives of which are known and planned for before the decision is made to build them. As a result, the large city machine is in a perpetual state of haphazard and piecemeal construction and congenital imbalance, incapacity, and indisposi- tion.® It is replaced and modernized seriatim. Blighted areas and slums are normal characteristics of a city, just as are beautiful, modern homes and villas and up-to-date office buildings. Imbalances and frictions, therefore, are commonplace. Construction of new facilities and repair of old ones go on continually in the modern city, engendering perpetual high social costs in terms of such things as noise, dirt, and congestion. This review of the important characteristics shouid prove helpful in taking a look at what urban economics is all about. Ill. URBAN ECONOMICS ‘Urban economics is a young field of inquiry even though it has existed in a rather primordial form for some time. It is an outgrowth of the increasing concern of economists with phenomena pertaining to or peculiar to the economic life of cities, and it has gained impetus from the development of regional economics, which emphasizes the spatial dimensions of eco- nomic activity.” 5 According to Kevin Lynch, “Imageability is that quality in an object which gives it high probability of evoking a strong image in an observer. It is that shape, color, or arrangement which facilitates the making of vividly identified, powerfully struc- tured, highly useful mental images of the environment.” The Image of the Cily (Cambridge, Mass.: Technology Press, M.LT: and Harvard, 1960), p. 9. © Robert Doriman, “The Functions of the City” in Contribution to the Analysis of Urban Problems, P-3868 (Santa Monica, Calif.: The RAND Corporation, 1968), P. 36. Pethe development of urban economics in the United States as a discipline was hastened by the establishment of the Committee on Urban Economics (CUE) by Resources for the Future in 1959. This committee was established to guide an ex- petimental program to advance the field of urban-economics. The initial member-6 UrdanExonomie Ans Scope ‘As a subdicptine of economics, whan economics can draw the entire ody of economis theory Ia this eonzsction iti etl fo Fook a tro of the petbaps strongest uends undelyng cvzaion—indwtisaxtion tad ‘wbanization, Economists workieg to. undzstand fadutiizaon have ‘malay studied peedusion, while wrbaniztion ie exes the study of ‘hema setmeat. Inthe past these two tends have tended to einfrse each other, but ii questionable whether they wil cntnve (0 40 oo ‘eed, In some respects indastriizaton and wrbspzaion are ona cliion ‘cours, with environmental concern and populaven grow signieant i mensions of a potent clash, Economics, ss a dacipline, bas ben concerned mainly wih wader stand, analyzing, predicting. and possibly infvening inition ‘Vast recently it hs pot bees concerned widh urbanization, Urban eco fomics is primary an effort to bring economies into the sody of ly, not to bring the ey Hato the stody of economies. Clearly, we know Tot about ecouemics, whereas We Know very litle aoa ies ad waa zation ‘There are diferent ways the economist ean lok atthe urban wold. He ean concentrate onthe fim and is production; of, a4 we have chorea to do, he can focus on mashes. The ressons fr our emphasis on markets ate the exceedingly high degree of Interdependence among econome ats witha a market, and, porhaps more important, the prevalence snd item shy of itedependencies among whaa markets, We tector have dcied ‘ot 10 look pon arban economics la terms of how mainly neossicat ‘conomie theory would be modiled by intedueing loeton and otter ‘sail considerations ito production and consumption decisions of fms 2d hoveahold,Lnted, because of the pervasiveness of interependencles trong fim, individuals, households, and governmental wis, we have {seced urn markete a the focal pat awund which we would Tike © ‘organize urban esogomiss ata dsciptine. And its urkonimerdependeney trich leeds us to give pariculratetin to housing, transporistion, labo, snd public vice markets. se Hon Wig hs po nin ie iy evi ales ett "read (WingsIntroduction 7 In the good old days we tackled the slum in a straightforward way by tearing it down. Now we know the slum to be a complex sociai mechanism of supportive institutions, of housing submarkets, of human resources inter- twined with the processes of the metropolitan community as a whole... to distinguish favorable policy outcomes from unfavorable ones is no longer a simple matter. Decisions by governments, firms, and individuals in metropolitan areas turn on the state of such interdependent spatial sys- tems as use of recreation facilities, transportation and communication nets, and the markets for land, housing, and even labor, rather than on the highly localized consequences directly elicited by policy actions.® Unlike the economics that focuses on industrialization, urban economics looks at housing not merely as an industry but as a service offered, at different locations, to urbanites who tend to have different ethnic back- grounds, work at varying locations, seek good public services, etc. Likewise, urban economics looks at transportation as linking urban- ites’ places of work, residence, recreation, etc. Unlike the economics of industrialization, urban economics looks at urban labor not merely as a factor input but also as a resident who consumes, votes, causes pollution and congestion, and gets into trouble with his neighbors and the law. And finally, urban economics considers the public sector as supplying urbanites with a host of services that not only make them more productive but also enrich their lives through education, .recreation, and protection services. Thus throughout, urban economists are concerned with many interde- pendencies related to spatial juxtaposition, displacement, etc. =~ Perhaps because urban economics has been born in an age of height- ened social consciousness and great visibility of social injustice, and be- cause close proximity can so frequently affect one’s neighbor for good or ill, urban economists appear to put somewhat greater weight on distribu- tional considerations than do economists who are concerned solely with industrialization. Also, the time horizon of urban economists tends to be somewhat longer. Concerned with the quality of life, they seek to be far- sighted and pursue a process of economic growth in which social cost and social benefit considerations overshadow firms’ profits. Urban economists, aware of the strong linkages between markets and the numerous feedbacks, would greatly prefer to rely on a dynamic gen- eral equilibrium analysis. Ceteris paribus assumptions ‘and partial equilib- rium and static analyses tend to be even miore limiting in the study of an urban economy than in a study of the national economy. However, this is not to deny that some partial equilibriim and static analyses can be extremely useful. The interlocking nature of markets within a metropoli- tan drea indicates how important it is for, the urban economist. to analyze and understand the mix, interplay, and level of local economic activity. ® Lowdon Wingo, Jr., “Comment,” in Werner Z. Hirsch, ed., Elements of Regional Accounts (Baltimore: Johns Hopkins, 1964), p. 144.8 Urhentzonomle Anoit The epnaes ofthe hy’ econo crs sly a we "ont te naa ccnany tt ay eal sein ane How dos uaa circ eat oct dala? ‘has stated: . : en Urban economia as a eld is related to ly andrei lasing nd to geography, plea scence, abd socloy a thy concen theres ‘withthe eit Bu, though relted fn coolest i appeson fo tase appears much more well for erkan econ to Wa ib autonomy a8 8 subicipie of economics rather than bcos com ponent of s subject matic labled Urtan Stix. This flow for th {Grange of specalbaton, for Be ecazamt qua eonamist can ing to eae high developed st of theoreieal eonact and metotsogel tool. Wid the dsepine of economic, the Seid cloly reed Teel pverameat fsoce, tnesporation economics rel eae ene, tad econass,aodeionl econo.” WW, ACAOR COMPONENTS OF THE FIELD OF URBAN ECONOMICS CUE Five Areas ‘There are many ways to tabvide the fed of wrbon eescomice. The CCommatee on Urban Eeanomiss sugested the flowing five core a 1. Stator ond growth ofthe wrben economy. The city i viewed ints Tole as compoucst of the nace! coats dere! Ia 8 0 ‘onal sytem of ete Prclems of ci gomth and dene are cate ea under Bed, 2, Intrometropoton erentaton and chinge. THs sibel faces on the spatial dimension of the metropolitan ecooey, i terms of the ‘rganaton of eeenemic ectviies within te rettpelis and the r= i ey fo ade atin of ay and ot, wn Dowsng, and urtan Uanspertton are specie toi of itr 3 Usben public yervters end welfare This ae inves concern with the futon public economy, adéresing problens auecitel wih eet ‘Mlowation of poble returees and fhe iteracion of the publ end ‘ponte sectors Topics covered face federal sate and Hoes ster n'a metopolaan conten and the demand fr acd opp of wan publeseniese 44 Exonomics of urban human rexourees.» «« Feat opie te howl fs suppers of Tar serves aon adorns aod wan FOR Taoar ar eoorumers of fsa prodcts of the economy. a pati ‘heres oacer with te pght ofthe waa Negro confronting er Moder eter.Introduction . 9 and housing markets constrained by discrimination. Migration, poverty, and investment in human capital {including education) are examined in an urban context. 5. Regional accounts. The systematic organization of flows of information needed for regional economic analysis is the focus of this core area. The urban region‘is the relevant unit for urban economics applica tion... 1% : It is our objective to show how economic theory can be applied in the context of the key economic characteristics of cities, namely, their spatial, specialization, and decision-making characteristics, In accordance with this objective we have subdivided the field, and this volume, into urban micro- economics, urban macroeconomics, and the urban public sector. Urban microeconomic analysis focuses on the market behavior of decision- -making units such as individuals, households, and firms. Usually the concern is with how these units seek to optimize their position in the market, particularly as they take advantage of such specialization as they possess. Thus urban microeconomic analysis draws heavily on the theory of the firm and the theory of consumer behavior; but takes care to place these theories within a spatial framework. Thus, it heavily relies on loca- tion theory. However, not only distance but also proximity considerations must be introduced into urban microeconomic theory. Proximity and pro- duction specialization together are responsible for the prevalence of inter- dependencies among economic actors and markets. Whenever the decision of one economic actor directly affects the utility or production of can but not through the marketplace, we have an externality.’? The specific decision units of urban microanalysis function in many markets, and the markets themselves are highly interrelated. Thus, urban microanalysis should take account of these interrelationships, as it seeks to develop a general theory of urban economics.-However, in a situation where many variables are all simultaneously dependent upon one another, it becomes extremely difficult to estimate empirically the microeconomic functional.relationships that would test and imprové the theory. The state of the art is such that it is more meaningful at the present time to apply microtheory in a partial rather than a general equilibrium framework. That is, it is preferable to analyze individually the specific important” markets, including their relationship to other markets, rather than to at- tempt the description of a general system of simultaneous relationships among urban markets. - Urban macroeconomics is the study of behavior of certain aggregate variables such as consumption and investment expenditures; exports and Ibid, p.7. 42 For more detail, see Chap. 2.10° Urban Eononc Artie ingors: governmenslrevenes snd expends; nd ecoanyaie ate, fcome, and empoymes, ct le ae sen Shee of the parormance of the urban economy. AN, te ets Gr Eon a are tal more sprathe tan le cosnonit, Thos, fore bcos indusies, Rowebolds teeone incose cance, pubic genes Neooe fevemnent, inde bores become rxupanal lnc, te Us acroeconowiss partly concerned shut eran cconwie change fd subs, vewnng tho #8 rroing manly thom elem foe fro the ecoronse owes tn tec rar arn eon. “Thor tan macroconomies i coniraed rt eny wih rs Seti Sonn petit, at ow ows a by gn fiten ing "High mate dns, together whines flere in es Rave soca anemones which sesung atom id qe ef ferers ave provided Teats fato ttn sees ae Nhl peta, Sed many of the snes have rnivey few site eh cond ton ead o make he tan economy erie, ners and wb “Th cea iby pont oe roan sony ale ty prodctionspedalation and opene, Hoveve et speciation fa Es, whieh a the ane in are he Cents eehclony.iepraiony nd entrepreneurs, ha ee a économie powth and igh ene isle Th wtan mcrowonomies tends to be much oe eonced ‘eh the eo eres he igs ht ww Some ae eed the postndciatecey” Ui mene Seay ah le be ami ole tengrunaibanizon posse Tis the pres by wich an conony Sete ea sy eae, yess ne ‘Wht estat disinaicn betasen lsoctonnies and cio cconnmes iste lvl of arpreguon oft eats fo whch be te ion! esnips ar serie, ere fos been Ie theoreti! nrireal roses in atempls fo age miorconome eaionhis te dee 2 couse macoeconomievnion beeen setae wt Shi" Even anes of sei cs, wbere one mig hunk woe ie csr to do a tan for twain s+ fl ths to een Poel 1b determine vat naons among eee et ates ty eas Gf segcening nizoccornierclaorss that are Known to Bl or Staind, hewshldyorfms for i reson tat we have AE ‘Sponste our dacosns of rise miosconamis and MASO=eOsO BFE Aa rtd ano Ecoamc Anse (Breeton 3. Pitin, eteon Introduction 11 *- even though we recognize they are both concerned with the same set of phenomena. Inquiries into the economics of the urban government sector, i.c., urban public’sector analysis, can be based on modern public goods theory and welfare economics. With their aid, economists can analyze and begin to explain decisions made by urban government officials. Such decisions cover a wide spectrum. Urban public officials are key actors in establish- ing a favorable environment for efficient operation of the private sector by providing for a generally desirable distribution of government services and tax burdens, by producing goods and services whose production gives them a comparative advantage over private production, and by using their regulatory powers to adjust for externalities. In this manner they are also expected to improve the quality of life. Analysis of the urban public sector must emphasize particular aspects of taxation and expenditure decisions, since location of taxpayer and serv- ice recipient and interdependencies play a major role in their formula- tion and effects. In relation to tax decisions, particular attention must be paid to the mobility of the tax base as well as the service recipient. In relation to interdependencies, governments must consider their nonmarket effects on the utility and production functions of various economic actors; they also are called upon to improve the efficiency of the urban economy by effectively dealing with externalities generated by the private sector. However, local urban governments, particularly under fiscal federalism, are faced with a further important phenomenon: interjurisdictional spill- overs, which are so abundant in an open urban economy. Such spillovers occur when revenues and expenditures of one governmental unit are directly affected by decisions of economic actors in another jurisdiction.** Thus quite frequently expénditures and tax obligations spill over from one jurisdiction to the next without the latter participating in the decisions responsible for these spillovers and the ensuing income redistribution. We can now summarize and relate the three types of analysis to partic- ularly important urban characteristics presented in an earlier section. This is done in Table 1.1. The rest of this volume is organized in terms of Table 1.1. Chapters 2 through 5 discuss production and exchange in spe- cific markets that operate within distance and proximity constraints in an environment of fragmented decision making. Chapters 6 through 9 discuss © the macroaspects of urban production as it takes place in an environment of overlapping governments, political considerations, and extensive vulner- ability. Chapters 10 through 13 discuss urban public services as they are provided and financed in the modern urban environment. In more than one instance, important urban characteristics are relevant to more than 15 For more detail, see Chap. 10.2 Uihen Economie dnp TABLE LJ TYPES OF ANALYSIS AND URBAN CHARACTERISTICS Deeet ai Mino, Mice nae npatan res Cee commie esis Be a 6 Paras ceeeees v foe ype of analysis. Under such crmstance, the main dicusion fa this Book wil be placed where the isu dmiaites. For example pro fy is malay taken up la the section on wban microeconoae stays ‘while in the public tector ection we deal wich the sue of one major by product of proxi, Le, exiles and silver.CHAPTER 2 INTRODUCTION TO URBAN MICROECONOMIC ANALYSIS I. INTRODUCTION Urban Microeconomic Concerns The theoretical tools of microeconomics are designed primarily to facili- tate analyses of the behavior of firms—profit maximization—and the be- havior of households—utility maximization. Resting on a solid basis of price theory, a belief in the pursuit—if not the achievement—of optimi- zation, and a confidence in the logic of marginalism, microtheorists can spell out the principles of how firms and households can be “expected” to behave. Transactions are the building blocks for microeconomics. A purchase and sale makes a market, and the principles of microtheory are applicable to any market, but they are particularly applicable to the pur- chases made by households and firms and the sales made by firms. Microanalysis is most powerful when it focuses on the problems of the firm, particularly when it relates selection of a production function and a scale of operation to prices and earnings. The counterpart microanalysis for households relates consumer budgets to offers of labor and income receipts. In short, microanalyses are strong in consideration of efficiency problems but weak in consideration of distribution problems. Because of their general utility, the tools of microeconomics should be applicable to the markets and problems associated with the urban scene. But the specific characteristics of an urban place, including space (distance and proximity), interdependencies, production specialization, and con- sumption diversity, may require that an effective urban microeconomic analysis take on some special characteristics. Thus we should ask whether urban microeconomics, as a special case of microeconomics in general, is called upon to shed light on any problems unique to or particularly impor- tant in urban areas, whether it seeks to view markets in some particular way, or whether it requires and has developed any unique tools of analysis. The first characteristic of cities, which requires some adaptation of standard microeconomic analysis, is that cities are explicitly considered to exist in a spatial dimension. In most of economic theory, space is not @ consideration. It is up to us, then, to integrate a means for handling space explicitly. One way of approaching the effect of space is to ask our-Introduction to Urban Microeconomic Analysis 15 ernmental interventions in the urban economy. The purpose of many of these interventions is to alleviate some of the problems that arise as a result of considerations of space (especially density) and of production specialization. Of particular interest to, microeconomics is the fact that firms and households must make location, production, and consumption deci- sions in the absence of concerted, comprehensive planning and control of the city or SMSA. As a result, for instance, a city’s Jand-use pattern re- sults only to a limited extent directly from government decisions. Instead, it evolves as a result of location, production, and consumption decisions made by households, firms, and governments, under governmental in- fluence. Economists’ Interest in Urban Markets and Their Problems In attempting to identify the great urban problems, we must be careful to distinguish between economic problems found in the city and those that are of the city. The more interesting issues that fall into the second cate- gory relate to urban residential land use and housing markets, transporta- tion markets, labor markets, and certain public service markets. The first three markets not only play a special part in urban America, but also re- quire specific consideration in urban microeconomic analysis. The fourth will be considered separately in the section on the urban public sector. Many of the major problems in urban areas are connected with the operation of these markets. Most urban problems are also problems in other places, but they can be identified particularly as urban problems because their intensity and perhaps their solutions are influenced by the interaction between the spatial, interdependency, production-specialization, and consumption-diversity char- acteristics of urban places. The problems of congestion and environmental: quality in urban areas are directly influenced by spatial considerations and exacerbated by production specialization and interdependencies. Some as- pects of these problems can be analyzed in the context of residential and transportation markets. Poverty is influenced to some extent by the effects of production specialization and distance on job opportunities. But most of all it is in- fluenced by interdependencies, which means that if one link in the chain of interdependencies, such as adequate education, is missing, the opportu- nities for passing over poverty thresholds are reduced. In addition, the interdependencies in urban areas often serve to raise expectations, which amplifies the intensity of poverty as a social issue, The evils of discrimina~ tion and segregation do not arise from the spatial, interdependency, and production-specialization characteristics of urban places, but they are often intensified by these characteristics, particularly in the Jabor and residential markets of urban areas.16 UikerEconamie deat Uiban nterdcpeodencies require the provson cf le warty of public services. Ti, in tor, rales problems of fiscal adequacy Dat ane ‘complicated hy diferences in attude concerning What consivcs a eg le distribution of these services an by the spillovers tht ae sect ‘wth governmental frogmenttion.Interdcpendences ako led to saben smal azrangements of the physical aspects of cis. As the ey ows fod changes incrementally, the exisiag spoil tnd. prodcton pecan characteristics of the ey reals 2 prvoners demo station for the indvidel decision maker, end long-run bevefcll opportune ate tet Seized No Tandiond ean etm his om and lnprove th quay ef ost ing, Farheroore, beesuse oftheir deastes and interdopendeace, min areas are particulary vulerabe to the demands of any éctermized soup {at provides esenial svices Not only doe thie represent a threat he besith and safety f urban residents, but it also cents to af Aiooary pressures and redaced prom neal caput. ‘Mlctecconomle theory {not problem. oF social sue otend, sex shoold urbaa microtheery be so encted. However, by Esting the igor {ant social problems associated wih urban place we are ina beter p= tion ta asiete the contibation that whan microaalse, parila Bo Ing, transportaten, and labor mavket analyes, can make tothe sohtion ofthese problems. ‘We will tra nest to production in an urban envionmest. UaSora- nately, we Gnd it easier fo poiat to inporast prodscden concerns fe ies then to provise rigorously derived vew theories or tons of analysis ‘This wil lee bo th case when wo tara i the lst sections tothe analysis of externalities and spatial aspectsof waa ackes, 1. PRODUCTION AND DEMAND IN AN URBAN ENVIRONMENT Production Concerns ne of the major cancers of microeconame theory is with production economies, We caa view eatrepreaeurhip, capital goods, works, sod ‘material as apo inthe preduction fooetia, and technology as its ope tional par. Technology ie dseribed and communicted ia a st of i ttitiony for combining ips so they wl result in an oupot of speed ‘Sharaterists, Like a eaketelp,techacogy species ingredients at well 5 the eequetce of operations. fa the neocasen representation of teh ‘ological change, improvements i Knowledge and techniges result in 2 ‘Mteraion ofthe produstivlyof inputs; a new prodacton funtion reso. ‘iitper 2, Mines, Tecpel Pores sod Miccconoae They” Ame con Elomi Rely, ab 39.002 Olay BD). B- 26Introduction to Urban Microeconomic Analysis 17 _ At first, production economics was mainly related to agriculture; later it was applied to industrial production. We are concerned with the special environment that urban areas provide the firm for its production of goods and services. There can be little doubt that the most sophisticated entre- preneurship is to be found in urban places, Entrepreneurs are attracted to the city because of the special living and working conditions offered by it. Together with a high level of entrepreneurship in urban areas goes capital intensity of the production process. Furthermore, the city provides firms with low-unit-cost input factors, for a variety of reasons, There are large and highly diversified pools of skilled labor together with a wide variety of skills and abilities. Firms are not only faced with large numbers of labor sellers in a given occupation or skill category, but they also benefit from the availability of this wide range of types of labor services. This means great opportunity to exploit the comparative advantage of various individuals. As the level of output of a particular good or service grows, opportunities abound for profitably employing these specialized skills. Urban areas also tend to produce low- unit-cost production and marketing information, and the wide variety of alternative suppliers offers flexibility and less costly adjustment in the rate of production. Thus, cities tend to be efficient input factor suppliers. Like- wise, they offer a broad array of urban government services. 7 To complete our consideration of the major contributions the urban environment makes to the firm on the production side, we must briefly consider technology. The progressive entrepreneurship and great capital intensity that we find in cities jointly and separately provide an environ- ment in which high technology as well as inventiveness and innovation fiourishes. New production functions are the rule rather than the exception for firms in the urban setting. Even when completely new skills are neces- sary, the city can generate them quickly because of its good educational and training facilities, which are adaptable to whatever the new demand might call for. Thus, firms need not be worried about changes in produc- tion techniques that lead to demands for new kinds of Jabor. But cities offer firms more than special production conditions. They also make it possible for firms to operate under special demand conditions that directly affect production. Thus, for example, the large population of cities makes possible a market demand sufficiently large to permit the Profitable operation of so-called “threshold” industries, e.g., theaters, .spe- cialized medical and professional services, sellers of exotic or imported goods with limited clientele, specialized employment agencies, etc,? In large concentrations of population we usually find close proximity ®The “threshold” level of demand is illustrated in Fig. 2.1, where the average total cost (ATC) relation for a representative firm producing ‘and selling a. specialized good is represented. The demand for the commodity is considered as a function of income and population in the urban area; and under the usual assumptions, about18 Unban Economic dre 1 a j i i i 3 aah Fic feo . AE 24 Reno ot etn of ¢ ‘threshold cctinsty, mentee lena nt met ne Soa Scie meres Syiemce eae aurmmeeneniace Seon ssoers 2ewaaene Sane sw anny tp pein hae el Secrest ual Porta cedars Sane ieieuty Deenouiiy memes arene combate ene oe seatwncvaretieianeen tino ie ieee aaeaeinateme rata acutraapi sche ny sft 7 cn sma a ei Fo ac sci aces mieten oot eeecereaet soeltgiate ee nencturine secre Eipraiey ca aememaes teen ane ELGt ewe ee ans Eee ocirana ateee Seger Pe pivesas mare sowammeneet Srey te af 4 bate wend epee Oe Sant eee Heres Syreseihtad Silas nent bestia Racy Bowes The Vale of he Unchaven Atereien, POLY (Sata Mo, SERS!Introduction to Urban Microeconomic Analysis 19 Thus the banding together of people in an urban area, including some who have very little demand for such facilities, makes possible the funding and building of certain urban recreational and cultural facilities. A second reason is related to benefits associated with the hedge against future declines in the desirability of the chosen alternative. As Downs points out, ca ‘The course of action which is most attractive today may become highly unattractive next week because of some unforeseen change in the environ- ment—including a change in one’s own personal inclinations. Even if you plan to do nothing but lie around on the beach on your vacation, it may be worth paying slightly higher rates to go to a resort which also offers a wide variety of indoor entertainment. After all, it might rain, or you might get sunburned, or just bored with such indolence. The existence of unchosen but desirable alternatives thus provides an “escape hatch” for insurance against future misfortunes.* Finally, unchosen alternatives can impart status. For example, many minority members tend to gain psychological satisfaction from knowing that they could join a very prestigious club or move into a wealthy, ex- clusive suburban neighborhood, even though almost none would actually join or move there. Consequently, many more people would tend to benefit from the provision of such capability in terms of status and psychological gains than the actual number of urbanites who indeed utilized the provi- sion and joined the club or moved into the high-class neighborhood. Al- together, the relatively high personal income in urban areas makes demand functions shift upward and offers increased opportunity for large-scale production and distribution. The result of the conditions provided firms by cities on both the pro- duction and demand sides ca be summarized under three major headings: production specialization, scale economies, and a broad menu of goods . and services. In an earlier section of this chapter, production specialization was pointed to as one of the main characteristics of an urban economy. The role of such specialization in increasing the dependency and interde- pendency of‘urbanites has been stressed. The presence of scale economies underlies many of the production opportunities of cities. For example, production specialization together with scale economies, including large groups of people, supports markets of goods and services that otherwise would not be profitable. And, finally, the large number of producers in urban areas furnish urbanites with a broad assortment of goods and serv- ices from which they can choose. This leads to consumption diversity and to improved matching between people’s preferences and the large variety of goods and services available. S Ibid.39 Urban Econom Aralyis Producten Infomation : We woud the ocr next the proton ofa spc god tat i of pris inert fo esaenvronnent We me eno oe sro, fo which we albded eater. 10 gnc 8 might fe wt to Separate the proucon (cos ond spp) forston io fo ee Un dinesioer—produton and Citta norton, tee Sof Heat and (or) fe, oe produced, dst by ener mn deg or commentatng i Oouph a chan! to * re The eons Si cu be with of what poss ad hereto fer Eve at be 4 mete diecon The datrtaten, vanes, er coamsfaioy tf infomation ts Oe feloving Ems (1) 2 ften @) a mee, G)'s etoeal, 4) exis, atenon Othe po te eee © a cocmon lanans, (tie for post aks pe, 23 @) ‘ont or mere pry toe eed “The information thus prodced f demanded by rc, wh, 22 sale te seater, have spel loess charac Sine ans Spssiy w eemomer Sed fe) produ ef loraton cn be oxy cor pce st exe momeat of ti, eniseneaioa pv # key re & toring a cooony rece. "An wbsnized econo, cus of en mig, a gh th nology, en fet ina goer te soppy of aod enand fx formation. "The pation cots, ite aro seme Oat cate De Altitudes ef frost, can be Jwer fn 2 iy sane ton ‘conony thin oa las obtaied or ina rua exon. Ress te {Sec a economy ply deeone sre of wchoogy 2 he act hat Itachiforpao beng price appa t be utp Thy 8 Nicer pis vt “On te vere ee ae ves more ees tha senda (tforsaton) : ne te tin tein smunaton ef infornton. The pip} esaec lor enaasion ‘Eforoatio nan wan sxe ares (0) the weno red word @) {i spten nod, emt throgh radi, pone tei, ams, ‘ott aod aoe eer mee tn opr seek om ese {ioe ws was acy (9) val tno, and (8) toe odo He, ce Reterece was made fore fo the prc fo whi nora I ric ity M nich reser te nfonstog i Greed. Pupil end Esc emai cn fe ied fom maton en, oh a hve cro nor prposts ca be oar forts om ‘Shui or ea an eichange ies, oo facia ane anions {Rita 1 Me, 4 Conmantceow Theory of Urion Oronth (Cxabit Hey as. 7Introduction to Urban Microeconomic Analysis 21 of goods and services. The former exchange mainly raises the level of sophistication and technology, and therefore ultimately the income, of the urban economy. More important, and of particular interest to economists, is the second type of information exchange, that is related to financial transactions between buyers and sellers who hope to benefit from it. The standard transaction requires time for negotiation and is conveniently re- stricted to one’ locale, It always involves some exchange of information between individuals or groups in society. Information exchange tied to financial transactions involves costs and benefits, and we would like to examine how urbanization affects them and is affected by them. In relation to the costs, Armen Alchian points out, “Discovery of the variety of bids and offers and the best path or sequence~ of actual exchange prices toward an ‘equilibrium’ requires costly search over the population.”* * Here then are some major cost components of the sender who distri- butes and the receiver who searches for information: search for possible buyers or sellers, communication of information about. characteristics of the goods of each party, contract information and enforcement, queueing of buyers, provision of price’ stability, and “buffer inventories” by sellers. Buffer inventories increase the options of buyers, particularly if a diverse inventory is kept. Vacant apartments and large inventories of goods in general have in common a key feature—costs incurred by one party gen- erally reduce the costs of search of another patty. Some of the specific costs that are incurred in information exchange designed to facilitate financial transactions include advertisements, window displays, salesclerks, specialist agents, brokers, inventories, catalogs, corre- spondence, phone calls, market research agencies, employment agencies, licensing, and certification. These costs are incurred in order to “facilitate the spread and acquisition of knowledge about potential demanders and suppliers and their goods and about prices they can expect to see prevail.”* The costs of both types of information exchange are affected by density and technology. Up to a point, information exchange costs tend to decline as the metropolitan area grows in size, for a variety of reasons. Perhaps the two most important reasons are the shortening of distances and the improvement in technology. In addition there is much specialization in the dissemination of and search for information in highly urbanized societies. Furthermore, there is the multipurpose use of information channels. Com- munication of information,is by and large a cooperative attempt on the part of a sender and a receiver to expand the realm-of ideas, expressions, and- experiences they hold in common. Thus the word communication itself derives from the Latin equivalent of communis, i.e., common. * Armen A. ‘Atchian, -“Information Costs, Pricing, and Resource “Unemployment,” i Economic Journal, vol. 7, 10. 2 (June 1966), pp. 109-110. ibid.22 Ushen Economie Aasiytts Foal, we wit sum to the demand for information, which idol i agate a igh ucbasaed erty. However, wile bese of igh es Epeadacis and the compleity of decons, many sts int ea ‘economy repre mach information, an iors} rg neni of doe Sos tend to be collective or goverment, Le obs den ade fr funny urban. Moreover, scr the we of fnfornaon Is mage ose ‘ficear though the insular concts provided in ces fy war ets, ny one destin equi es informatio, "Thos appears that ah advanced posta tan een. nis ae favored by extrely lng smoaai of peraest loon ‘hich, prodosed and excnaped at lov con can pealy cibsre de ronan’ etizasy. Under tse condone fis can ale erent tir of ek entepreneuial apace, nvenivne avaible, td acces (o new techacoy. Alo, thee Loowedpe of 0! eae Toate lceing labor, fs impo, togetee wih tr eden, cf tossys and tmarow'smsbete, Capes as been shaped ans fas the demand for produ, progeny, dating and het aor. tia "Bur housholés ao ase Ihely to tee. To comune, more ter information can ean an elated menu of pools a rere © thee (comand ater mathng Beveen acho ad prec. Paces wo comumers maght be lovee, beh beau eotamet ext ae zor Inforoed paras decalom abd ease of ts erased canes tion among seer. Fortarmor, Bowel fa ei spc fer supple can boneit as cons of ie ova enployenat earch aod tat ‘tbe serch for enployess by fms are feloced od, wi Eel toemployment. More tad eter lowest iforsaton abo ats Hisy {o te open dsp aed tomorow shold improve te haces ol rover paring themsrvs to tke and Fal poses. But ies ao ole ed [Etomaton on how and whee tose aig and easing fr war rows employment opporales. Ye, for hoses a wl for 8 teow and beter formation tends Tower cots at ebo 10 eee ‘omptiio, Thos, wl it Becomes ese fo lost employes here WL ‘ho endo be more procs competing foreach poston. ML. EXTERNALITIES IN AN URBAN ENVIRONMENT. roxinty and specialization of economic actors ae impoisst charter lates of viban economies. Theso two characte, pareulry ix 8 ‘orld of alluace and advanced technology, are responsible fr tbe Pes ‘and Inge quantiy of externalities occotiog in urban erat. In rect Years ecovomits have Gepened thelr insight to exeraiies and base ‘Sxeloped methods to enalye them and to advaace poley solusons IaIntroduction to Urban Microeconomic Analysis 23 dealing with them. E. J. Mishan considers concem with externalities as “a new field of specialization within the broader terrain of welfare eco- Bomics.”*° Externalities is not a new concept. Alfred Marshall referred to what he called “external effects” as economies external to the firm but internal to the industry.** A. C. Pigou elaborated on the concept and pointed to it as a chief cause of divergencies between “private net product” and “social net product” and, therefore, as preventing optimality under condi- tions of perfect competition.** More recently, contributions to our understanding of externalities have been made by J. Meade and T. Scitovsky; and Kenneth Arrow particularly has helped clarify the concept.?* However, there is no unaminity among economists at this time as to the nature and definition of externalities. Perhaps the most all-inclusive view is that of James Buchanan and-Craig Stubblebine,* who talk about a “potentially Pareto-relevant externality,” ie., an interdependency generating “desire on the part of the externally benefited (damaged) party (A) to modify the behavior of the party em- powered to take action (B) through trade, persuasion, compromise, agree- ment, convention, collective action, etc.” A similar view can be attributed ito E, J. Mishan,"® who defines an externality as the dependence of some- one’s utility or output on an unpriced or improperly priced resource.'* If one of the resources is improperly priced, then gains from trade are possible. The difficulty with these definitions is not so much that they use Pareto optimality as a benchmark—in theory any other social welfare function could be chosen—as with their implication that any inefficiency is an ex- ternality. As Roland McKean points out, “. . . any falling short of either the production-possibility boundary or the ‘utility-possibility boundary’ 295, J. Mishan, “The Postwar Literature on Externalities,” Journal of Economic Literature, vol. 9 (March 1971), p. 1. 11 Alfred Marshall, Principles of Economics, 8th ed. (London: Macmillan, 1925). 12. A.C. Pigou, The Economics of Welfare, 4th ed. (London: Macmillan, 1946). 18 J, Meade, “External Economies and Diseconomies in a Competitive Situation,” Economic Journal, vol. 62 (March 1952), pp. 54-67; T. Scitovsky, “Two Concepts of External Etonomies,” Journal of Political Economy, vol. 62 (April 1954), pp. 70-82; and Kenneth J. Arrow, “The Organization of Economic Activity: Issues Pertinent to the Choice of Market versus Nonmarket Allocation,” in The Analysis and Evaluation of Public Expenditures: The PPB System, A Compendium of Papers of the Joint Economic Committee (Washington, D.C.: U.S. Government Printing Office, 1969), pp. 47-63. 14 James M. Buchanan and W. Craig Stubblebine, “Externality,” Economica, vol. 29 (November 1962), pp. 347-375. 38E. J, Mishan, “The Postwar po on Externalities,” Journal of Economic Literature, vol. 9 (Match 1971), p. 1B. J, Mishan, “Reflections on aan Developments in the Concept of External ifects,” Canadian Journal of Economics and Political Science, vol. 31 (February ), p- 6.44 Orton Exon Anais means that gains from trade are atable—or, ia Mish's tenn, that some resource inpeopery prized." Ralph Turvey avoids this problem by defilng eversives at “Ue Smpues ofthe activities of houshotts, public agencies, o enterprises vpon the acts of other households, public agencies, or ealerpats which ae ‘exerted otbermise than dough the mache. They are, ia other words, fe Tatonsips other haa thee beeen buyer aod salir “ogither with Ralph Turvey, Kenneth Arrow, and E. 3. Miso, we ‘propose that an extemaly exbis Whenever the decison of ove econeais actor, eg, household or fim, dicelly aes, throagh nonmaket trees actions, th wily or production fenetons of other economie ators am as possibly its own Exieraliy,tha,resuls a esourees are exchnged Sn nonmarker stustion, comment involving involuntary exchange, | One inividual’s (or Sim's) consumption ean eater Into arabs itty (or production) fuaction without proper matket compensation be cause of inperfect appropriation ef resource rigis:* lnperet appcpr bli of resource rights means that because ef techoclopical reatons 23, Jnvidul, household, finn or governmental unt Is wable to fly pero Diate (or capture) the marginal vale ofthe bene each produces ori ‘unable to alleviate costs somebody else imposes.” That, while from 22, ‘conome perspective, “resource fh” refer fo rghs to make deeoos bout resources and to claim te resulting rewards, thee my be resons ‘why these sighs cannot be aserted. Since these ght help hspe the Tovschols, fms, and governmental unit's set of opportune and trad oe, and therefor, tie behaio, the efecteness with which these rights ‘rc eaorced wil alo afet behavior. ‘When there i Iperfect appropisity of resource rights, thea Muse rave's “exclusion principle” cannot work. This isa pcp which post ‘Btes that ao indiveual should be “exeloded from the enjoyment of 2y parila commodity or evn: unless be i wing o pay the stipulated Daze fo the owner When ter I Jolt eoesumpcon, 25, for example s¥Reand N. McKean, Appropiiy and Euertiey iter Goeenent, Tare peared one OAC ie COUPE mevise ia Cubs, ase (e- ‘ey on ext 1 mre Fan {er den) ian pre the soon of {Ge tad 2 aoouc o ae Nise Spc ierea circ on Eaemn SS haieal ad acebea reasons may eedoce appropriate, tooth t «Jes Red A Meee The Teo of able Fane (New Yor: McGrawIntroduction to Urban Microeconomic Analysis 25 in the famous lighthouse case, and exclusion is impossible or requires considerable resources, then resource rights will be imperfectly appropri- ated. In short, appropriability can be made easy or difficult because of technological characteristics of the phenomenon under consideration. It is the high cost of effectively excluding individuals from partaking in joint consumption without proper payment, ie., high transaction costs, that interferes with the existence of a market and brings about externalities. This view of transactions requires a major modification of conventional microtheory, since most of that theory implicitly assumes discrete inputs and outputs with perfect appropriability of rewards and burdens. But this is an invalid assumption, particularly in cities where externalities abound and inputs as well as utilities of individuals (and outputs of firms) cannot readily be identified and appropriated.** Since an externality is generated by one or more decision units directly affecting one or more units (often including the first unit) outside the marketplace, several important questions are raised. Which actors initiate the externality and which are affected by it? For example, in the conges- tion case, many individuals participate in affecting others’ utility functions, with virtually complete reciprocity. Thus they all contribute equally and are all equally affected. However, in the pollution case, one or a few in- dividuals (or firms) affect the utility (or production) functions of very many individuals. Can the externality be traced back to a divergence between what people are individually motivated to do and what they might wish to ac- complish together, or is insufficient information at least in part responsible for it? For exampk, if a driver before entering a highway could learn that it was blocked a mile away because of a traffic accident, he could decide to take a side street.and by so doing not impose congestion costs on himself as well as on others. 7 Is the externality spatial in character, e.g., mainly a function of density, or is it the result of technology or affluence? If space is important, as in the case of neighborhood effects, “an individual’s utility depends both on others’ behavior (e.g., esthetic, criminal) and oa their location.”** Now let us consider how externalities and their anatomy are affected by the dominant features of an urban environment. There is much evi- dence that affluence and advanced technology are responsible for the very large number of externality-producing decisions being made. In an affluent urban society very many activities take place, particularly many involving high technology, which in turn entails numerous externalities. Affiuence 2°Matters are further complicated by utilities and outputs being so frequently multidimensional. For example, a house provides not only shelter but also access to jobs, public services, desirable neighbors, etc. St Atton, op. cit, p. 59. The diferent externalities wil be dlsoussed further in Chaps and'13.28 When tonic drt nor ep ain es ih sein ea SULIT Sig Soy et emma ee Se inwiciy pepsi ahaa Tepe ek Tout apd Poa le eet at Se ae Eira es sachton eae ot ent oon “eda tg ih pa ae eae weg soe se ae a Shy ines cnet OS ale Saee ROLE IgO i pean Steencpe ann Se poeta aay haptic ect storia eatin son weber eiccmste e ipo pin, any i i ect ae Some eee Sac Se Sn et ly Sp ee Se cat Saale ee oie Sabo tiger pct ar rate etapa Sinan tne ete lt ton ean ee et aise ae na et ite a eg vr eee ti atthe sata one ia Tease Cerenoe SE techs & Shee Seite bp lap aa Che Seubui eaan’ fae his ane acre eet i pet pe nd oe SE SETI Sposa eae on toe Ug pere 1. rots ron anges Brat Cee Gea exer apes ot ey oe Sl oer OT oe nee So Geet sen pa oat EATS et ee ue eet Seiad emia cen «tame St See eee a a eect ore Gtl i S daee wa os8 Sasa! Ste ou mera nee BO wo feat and seen en ts fer og somes ee hn han tora iIntroduction to Urban Microeconomic Analysis 27 The beginning of regional economics can perhaps be dated by the writings of Johann Von Thiinen in the early nineteenth century. Alfred Weber then provided the “classical” view of regional economics in the early twentieth century.*’ Three directions of theoretical development rele- vant to urban economics have emerged froin these early works: Considera- tion of the effects of distance on production, exchange, and location, includ- ing consideration of its effects on the spatial extent and shape of markets; consideration of the spatial distribution of cities within a system; and con- sideration of the spatial sources of growth for a city. Walter Christaller in the early 1930s was probably the first to provide a firm empirical basis for the observation that cities are distributed not randomly but rather in some ordered relationship to one another." In the 1950s the two “competing” theories explaining the causes of a city’s growth were eloquently spelled out and the debate is still raging about whether, as Douglas North argues, demand through export markets is the primary factor in city growth or whether, as Francois Perraux be- lieves, complex internal factors of supply are more important.”® Fae M. Hoover, An Introduction to Regional Economics (New York: Knopf, 1). Harry W. Richardson, Regional Economics (New York: Praeger, 1969). More dated, but still relevant overviews are presented in: John R. Meyer, “Regional Economics: A Survey,” American Economic Review, vol. 53, no. 1, part 1 (March 1963), pp. 19-54. Walter Isard, Methods of Regional Analysis (New York: Technology Press and Wiley, 1960). ?7See Carla M. Wattenberg, tr, Von Thiinen’s Isolated State (London: Pergamon, 1966); C. J. Friedrich, tr., Alfred Weber's Theory of Location of Industries (Chi- cago: The University of Chicago Press, 1929). Prentice-Hall, 1966). . C. W. Baskin, tr., Central Places in Southern Germany (Englewood Cliffs, N.J.: G. Manners, “Urban Expansion in the United States,” Urban Studies, vol. 2 (1965), pp. 51-66. Brian Berry, “Cities as Systems Within Systems of Cities," Papers and Proceedings of the Regional Science Association, vol. 13 (1964), pp. 147-163. 2® See the following: Douglas North, “Location Theory and Regional Economic Growth,” Journal of Political Economy, vol. 63 (June 1955), pp. 243-258. Francois Perraux, “Note on the Concept of Growth Poles,” Economie Appliquée, 1955 (reprinted in David L. McKee, Robert D. Dean, and William H. Leaby, Regional Economics, 1970). Niles M. Hansen, “Unbalanced Growth and Regional Development,” Western Eco- nomic Journal, vol. 4, no. 1 (September 1965), pp. 3-14. Edward Ullman, “The Nature of Cities Reconsidered,” Papers and Proceedings of the Regional Science Association, vol. 9 (1962), pp. 7-23. Brian Berry and William Garrison, “Recent Developments of Central Place Theory,” Papers and Proceedings of the Regional Science Association, vol. 14 (1958), PP. 107-120. Benjamin Chinitz, “Contrasts in Agglomeration: N.Y. and Pittsburgh,” American Economic Review (May 1961), pp. 279-289.28 Urhen Economic Asis “The costs associated with distance Between makets are ictoduced into urban microccoromics i twe important ways." Analyse of vibst [oduction and exchange specially eonsider the ets of tearspriation and marketing costs on market sie, scale of operation, and subsitiion ‘possbfes beeen wanspertation and eter inputs. In adion stance Costs area asl consideration inthe formation of lesion theory, wich ‘seeks to explain residents locaton desisons of howneholds andthe sie location decisions of mannfactring. wate, and service estblihments Some ef these leatonsl considerations are also applicable to Teaion of able service fits, ‘Concern withthe eects of proniiy, incdang the rested ives of getter diversity and increased mxrket sie ha stimulated Further dveop- rect of benefitcost analyses. Although sich analyses ave nota few tol of urban microeconomics, they make exenive wie of miroeconomic ‘theory and they are Hkely Yo esl in improved formulations of the baie theory. Finally, ura deasiy, and to some exteat deterioration inthe urban eneroament frees aplied mlerowonomie analyses to explikty ‘onser land as a fetor of production aad o take seront of sump ‘ons forthe spatial form of ces ‘The Eject of Disance on Production and Exchone ‘Overcoming distance is @ prvetive activity, sad input and opportunity foie are aepeated with i Edgar Hoover bas usd the generic term “arses” to include not only te transportation cets of moving goods (oth inputs and osspars) and people (ss consumers and workers) but flee the tnsmion of such loangbles es eneryy, information, and ideas" “Considerable attetin has teen devoted in the erature to tsnspor- tation costs. Howeves it my Bo Ut the costs ofthe itanpis tones ‘sre ere of tans on srotetn xin Seton and eat of met ‘Hoot Fetig, “Toe Lang of Res wae Conte Condor” Eero tw 3 fete he DS ‘Ard Satie, “Opt Lest 2 Spotl Compeion” Jornal of Pots Sigel Gate un a ; ‘Bupa Lov Te Eoanat of Lact (New Have: Yas 1958), ‘aber td Zcenor ond Space Economy (Cambri, hin. MALT. 1956 ‘lear Hower opal Esse Pra gun Aposth® Eng elise Saal sacs (Ben York Nasa 0 ss eae Dove, pnat sora Geel Etim Arposh in Excl fie Sot sStncs Say Cork Nacetn 60 = iva ecrhay “The Sie and Shope che ret Are of « Fim Stee Sarah wo i Gay 50) 9997-0. Hoon dt aad to Reorel Bonomi ep ct C83Introduction to Urban Microeconomic Analysis 29 are much more significant in production and exchange. For example, mar- keting costs, the need to supply rapid information to suppliers and cus- tomers, and the advantage in being tied into the network of itleas concern- ing production techniques, potential market changes, new products, etc., will all influence a firm’s activities, including its decisions on plant location. Similarly, households require information about job opportunities, the quality and prices of the items they want to purchase, and the location of vendors, all of which will influence their real income and the ways they spend it. For empirical simplification, unit transportation costs of goods are often assumed to be proportional to the distance traveled; however, the actual distance-cost relationship is not this simple. For example, to ship a good, there are some costs—such as packing and other preparation costs, as well as other costs of loading and unloading—that can be considered fixed with respect to the distance the good must travel. In addition, the technology of transportation is such that for most modes the average costs of transportation, with respect to distance, decrease as distance increases. These two features combine to produce a typical transportation cost func- tion that is nonproportional; however, as long as marginal transportation costs—the costs of transporting a unit an additional increment in distance —are positive, the results of frameworks and models illustrating propor- tional transportation costs continue to hold. Another common simplification assumes that for any distance of ship- ment the marginal transportation costs are a function of the weight of the product being shipped. This simplification neglects the influence on trans- portation costs of perishability, which is related to Jength of shipping time. Marginal transportation costs are also affected by fragility and bulk and by any fire or explosion hazards associated with the good. The combined influence of these factors determines the transportation cost of goods that confronts firms and that enters into their production and exchange de- cisions. Transportation costs to the individual of personal travel are comprised of two parts: out-of-pocket costs (including any capital purchases) and imputed value of the time spent in travel. The time costs of travel are often more important in the individual's real income and to his decisions con- cerning work, exchange, and location than are his out-of-pocket costs. The relation of transportation costs to individual and household deci- sions is discussed in Chapter 4. Now consider the effect of transportation costs on operations of the firm. Imagine a buyer of some particular product who demands some quan- tity and has a normally downward-sloping linear demand curve. The price confronting the buyer can be considered as consisting of two parts, the FOB selling price at the plant or store and the transportation cost to get the product from the plant to the buyer or the buyer to the store. If we49 Urbor Economic Ants ase ha th tsp et an reg ft then th amount tat Would be paras i et hee ne rae font wold bd by sont uty tec ee eked ea ti on eecbted wil anne. These fers oe a am or ore te om hte. esate hr domed EGimined by espe fis demand ane he ceo Fever tcl dobre twcernoes be ow ius anube Bat bmyon tee aed og a Tea conor tm ts pat os tha ey been td eer Se ‘Bod cares at yp ie eenporcon ie set oh Che pts the dead fore pod ef hepa cr ne SR ce ge ori ase ae "el demo would te toate pot whe te anautwih scl ts pots te neva satin co ee de at Tjahes nano at eres oapersloncs “hen te ott emae canes wanpettin cost ie uitin'& bene popaple mic es fr ec an ‘Semel thr tue of Be toutet aa we te tr pat ‘Srp tasyrtin oss ere pore FOD leg ee fehl neh rere Bene Cosa fre fed of es pene” egy desde ape be po We sn feral ors wed be Sent coe w he ie reat 1 dna uso nine ae coppers ce eid all's « takers al oun ae Se of dete Sek slough te datacequrdy desnddfaon vol spe letid in aedon fk "Tne a fonees re endonel modaons at wold ae co tennes Se oren nab out appa ae fe se Ea crate ssnpton ast bora en Sng 2 single corridor in one direction from the plant would have to be changed ee tl aes a ses cept REE SIEUINy eimai dase ene wea ee ape eres See oe ta url eaperain eo ae se eae anette cl A cen wood he SERSTTGE U5 ofopen sais tara anaes ao, ‘Sema eye sas wi ten ne es be cen Sori eg Ao ead domal et old ve te er Finally, if the seller pays for some or al of the transportation cost, the Soant paul dated eos wbeteced esr ented ye rman ir i tach a spay ef epeng a pot ota 9 BE ing te transportion cost slicing In hs delivered rie oft Wane ny sigs dno poe ae Maer eoIntroduction to Urban Microeconomic Analysis 31 variable price depending on distance. In selecting his pricing policy, how- ever, the seller will need to consider not only the demands for his product, but also the production costs at different scales of operation. Thus, under these conditions, once the prices are set, the quantity of his scales and the range of his market area are simultaneously determined. To make analyses of the effects of distance on exchange and produc- tion-more realistic, the assumption of a single seller should also be relaxed. As the later discussion of location decisions indicates, there are some in- centives for sellers to locate at different places in order to corner a par- ticular geographic market, i.e., to become “spatial monopolists.” When this happens, the production, pricing, and location decisions of firms be- come intimately interrelated.*? Analyses of a situation in which the location of sellers is fixed and the buyers are distributed over space surrounding the sellers are particu- larly useful in examination of the trading areas of retail or wholesale establishments in the city or of the operations of a plant that is selling materials to many other establishments in the city. However, we should also consider the situation in which a buyer is in a fixed location and the sellers are distributed spatially. Such analyses are useful particularly in labor market analyses and in consideration of a situation in which a single plant is buying materials from a potential variety of vendors in the city. If each supplier of labor or materials is considered to have an upward-sloping supply curve, then a distance-quantity supplied relationship can be derived for each “delivered price” paid by the centrally located buyer. Such a re- lationship would show that the quantities supplied by various sellers lo- cated at various: distances from the buyer would decrease with distance and that the location and the quantities supplied at any distance will de- crease less rapidly with distance—as the marginal transportation costs become smaller. For example, consider the provision of labor services by households to firms (which will be discussed more fully in Chapter 5). The buyers of ‘labor services can provisionally be considered as located at a single point such-as the Central Business District (CBD) and the sellers of labor serv- ices as locatéd around ‘this point in various residential districts. Assuming an upward-sloping aggregate supply curve of labor services with respect to the wage at each point in space, it is then possible to derive for each wage paid at the central Jocation the amount of Jabor services forthcoming from households located at various distances from the CBD. Although many other factors enter the situation, when these factors are held constant the empirical results generally indicate that the labor supply falls off with distance. *? For a discussion of alternative pricing methods of spatial monopolists and their effects on the profits and market area of éellers, see Martin Beckmann, Location Theory (New York: Random House, 1968), chap. 2.SE Urbex Bconami Anse ‘The Efees of Disance on Location 1ehas already bee pit ot thatthe cos asta with ou Citas fom mare wl fae he ca of enon of le {sabihment se, The etental lmao dion cused a Ges Fah recente dei ys ot ely wap ot tat tase en, et so sch oer Futon land Cont, eng tx swe be ese Polina ares, ning replatons abr aod ert cost td Be Sete of le sash, ade oat, ds saat ed ta et pote bye "The loan deca of «profile tm shoul be arnt wiles er spray asualngsnainay fr te a Iocan, eel oops, ri, sl of lant acd, contin ope fod so 0a" Hower, to eile some of the tporant rnp ie err fo mot wth mney esp lomaine Lat us ep yc {idag te ese where afm bar singe mae ice ep, Sd proecion reqs a age lot" ati nah a (oie {toa} some ober pot" Thus, ee ae fo zane fo exe: Gitano tat he opts omen ie oof ness inp ogl o iaat and dance planeta mae a tee ttt ep moe lm plat ote uke Now Ket ssc Se now th cont of tetportng “equa” wis of pas ed oot Pos perenitt dace Wun aed ast plata ast gin es, tet anspor toa eos asad wih ving apn tt he lat a ha oe polit le eo ok sporig seu apa ent ad De tate vend See ere aye ete ‘remih so wy tts fal aspera co (ot bh np ep) sect ih reg en een pod owe fer een Dovph only ose pt ude topos te oe we [SSSor tt aaegoes Sone tannin, oa te a eet hea vig te pa ad npn ovr a ak Soe es wey (oe case of eng ret fa WOT esdecaas feplonl Ansys (osomre: Po coed atest of a pe we aIntroduction to Urban Microeconomic Analysis 33 to modify the constant term by this differential cost if we are to obtain the true total transportation cost. If, for example, the input gains in weight in _ the process of being transformed into output, the modification would be to increase the constant term; if it loses weight, the modification would be negative. In order to minimize the transportation costs, therefore, the firm is likely to establish a decision rule that says, “Minimize the distance be- tween plant and market if unit output costs for transportation are greater than unit input costs; but if the reverse is true, then minimize distance be- tween input origin and plant.” The minimum value of the distance between plant and market is zero, which puts the firm at the market site, and the maximum value of the distance between plant and market is equal to the distance between input site and market which puts the firm at the input origin site, minimizing the cost of moving the input. Even if the transportation cost functions are nonlinear or, more im- portant, if they have nonzero constant terms (which can be related to costs of loading and unloading that are independent of distance), the re- sults will be the same. In order to minimize transportation costs of both inputs and outputs, the firm locates at either the market site or input origin unless the cost functions increase at an increasing rate with respect to distance. Assuming that these cost functions tend to exhibit the normal pattern of diminishing marginal cost, this problem will not arise.*’ The important result to keep in mind is that where only two points are in- volved—afi input origin site and a market site—then, whether the cost functions are linear or not, the one of the two points that minimizes cost will be selected as the location site of the firm. The single condition— sufficient, but not necessary—for this conclusion is that transport cost functions do not exhibit increasing marginal costs per unit of distance. Unfortunately, the simplicity of the two-point model is lost when we consider situations in which there are more than one input site and more than one market location. There are two ways of handling multiple input and output locations. The first method is known as the Webcerian Triangle; the second method utilizes isocost maps. In the Weberian Triangle method,** there are three locations to be considered, consisting of two input or materials locations (X and Y) and one market (D). Connecting each of these three points yields a triangle within which lies the cost-minimizing location of the firm that transforms * these inputs into an output. Imagine that a firm has a production function relating its output to two inputs. The transportation costs for each “equivalent” unit of input is equal to the transportation cost per unit of input times the distance moved over the average physical product; the transportation cost of the 37 See Alonso, op. cit., p. 344, for the argument concerning diminishing marginal cost of transport where the margin is distance. 38 Thid.4H Uden Econom Asi ‘vtput is ts uni transfer cost ties the dhtanoe itis moved. Th tot lMansportation cost the sum ofthe two faut ost andthe outpace “The value for each input ard culpa taasporation cox wil depend co here the fm locates: changing the Tocatfon of the frm within the Wes- rian triangle wil eause an ypot or eupat transportation cost decrease Hany other cost inerenses. (This is not the ese for movement ro aide to outside te ulangle) The unit transport costs of the faputs over tht average physical product nd the walt transport cost of the outpot een be thought of a weiphts applied to their respective claances moved. The ‘costminimtaiag locaton af the fen would be detersined by the mags tude ofeach weight: the lrg the weight, the greater wil be the “pall” to the input exzin or market sit, as shown in Figuse 22. The coeliceats {determining the int weight or “pal” are the cost of tensjorng that Input trough a given eistance over the average phsieal product of ipet, ‘andthe output “pull"sgvea by te cost of wansporting the oupat. ‘The ection teehnigae olined above can be extended Teer to a tage number of eases, alhough the matbemates becomes diet ster the threepoin eae, ‘Where thee are many input Ieeatons,a second approach tothe po ‘ema ofthe fms location is to develop what is elled an Gedapane mp! ‘Again we ean assume that there sre io input locations and one market, Joeation. About each of these tree We ean draw ious, oF ses alo, stich the cont of wansporting the good relevant to that pot is constant “These wll bein the form of concent cles about de ols Te val ttoched to each sucesvecace wil pend oa te esrocteritics of the ttanspot cot function for that goa. Te general, these vals chou in- tego lee rapidly than dance, becuse of iminshing maga! cost of "A map such as that shown in Figure 2.3 will show the intersections 1 see Bekman ep e. SS Aono, op ee 348.32 FGURE 22. The Weber toneIntroduction to Urban Microeconomic Analysis 35 a ig 1b / ni / / 9 E > | i i 7 / 3 | > t Vg f 1 ic 1 ( a4 1 ‘ \ | MAI VY e i A 7 @) . L] l \ 7 X < \ t 5 eT Yo \ \ SE 6 = U3} \ a S. \ \\ 2 7 \ 8 : e \ . 7 ~ ‘3 S ~S \ \ 9) SUT Cay} N. \ \ AO \f® N. a ih 3 5 te 12. SS 2 ss. aa N S > a ~. x —O—— Tost transport costs (isodapanes) FIGURE 2.3 An isodapane map with two input locations and one market. source: J. Friedman and W. Alonso (eds.), Regional Development and Planning (Cam- bridge, Mass.: M.I.T., 1964). of the three or more systems of circles. By taking note of the total cost at each intersection, or the sum of the values shown on the three curves, we . can construct loci of such intersections with equal costs. These loci are the isodapanes, and they represent all the locations at which a firm will have to pay the same total of transportation costs for input and output.38, Urbon Eeonomie dna Since the sotins ae cloed eices, the Ssodapaate ill be ehaed figures as well although not pecesarly ciclar. They wil ko bre regularly diminishing values, moving from ooside 1 indde, Ths, be ‘ostaininizng Toston forthe fem wil be the orga ot focus ot ibe Eodapane map In the igure this isthe pont Ae ‘This approach considers the marks for 8 Panicolar good at pei ‘Howeser, if this assumption is relaxed and the mavket i coaiered a set of potential buyers located at diferent plats in space, a8 as dont cater, the analysis can acount for interdependences ofthe lation de sions of firms slog the same good. In the preseace of more tsa ent supplier of a parolar good, the eléet of varsportation exis sto sae ‘ment the entire market into geographical separated submakes or mt- set areas, regions in each of which a sage sale isthe lowest cst sppie ‘ofthe good. “Tue mavket are forthe Sm i the area surrounding iin whic bye prefer to deal with i under perfect competion In every respect cer than space, To determine the pres that a buyer aust pay at any dace ‘rom the fm, i & necessary toad the FOR price a the plant or sare andthe cost of moving the good from the frm to the tuye’ lotion. "The way tha the price Incense wih distance Is show ix Figure 24. Te segment at F repreceote FOB price and the lines gong away from O ‘ein low the rate of lactcase i pie for distance. The igre shows ‘Sich fms for which the slope ofthe transport cost fencdoa is equal and ‘the FOB price i equal ‘The boundary (8) between tb two masks eras Is straight line; F has the market to the Ht of and £7” that to te ight. Ta panel a of Figuce 2, tassport cots are the same, but te FOB rice of firm Fy higher than at of fra Fy. This esl i = byperoe ‘boundary between the two Am marke areas, wih he lows eos to Fo ‘he fir with Ue Bigher FOB pric. Jn psel bythe FOB prices are equal ‘ba the transport com grete fr Fy, Notice that the transport ost fre. ton for Fy conticues beyond the market eres for Pe, This meas tat be thet ates ofthe later is wholly contained witha the area of the fot, PIQUE 24 Marte area Beandary nh egal preIntroduction to Urban Microeconomic Analysis 37 = 2 a a r mpy mp mp, } Fy OF Fy Crear Distance Distance a: Mill price difference. 4b: Transport cost difference with enclosed market area. FIGURE 2.5 Conditions for hyperbolic boundaries between market areas. These diagrams present a picture of the division of buyers among different sellers for given locations of sellers. However, the location deci- sion of sellers depends clearly upon the location of other competing sellers. To illustrate the effects of this spatial or locational interdependence, con- sider the case of a group of buyers distributed spatially over an urban area of fixed size and assume initially that just a single seller of a particular good is located in the area. Then the entire set of buyers makes up the market area for this firm. However, if this firm is earning profits, there is an incentive for other firms to enter the market area so as to earn profits as well. The entry of a second firm (and successive firms) decreases the de- mand for the firm first established in the area; the entry of other firms may increase the prices that the preexisting firms must pay for inputs as well; but we abstract from such considerations here for simplicity. If buyers are spread evenly throughout the original market area, the entering firms will attempt to locate as far as possible from the existing sellers, so as to gain access to as many buyers (as large a segment of market demand) as pos- sible. If we treat each seller as a spatial monopolist, the entry of additional firms is an example of “monopolistic competition,” in Chamberlain’s sense." Diagrammatically, this case is presented in Figure 2.6, in which the entry of additional firms is represented by a downward-shifting de- mand curve faced by each firm. The incentive for entry of new firms is eliminated when the demand faced by the (representative) individual firm has declined to the point that profits are eliminated.** An important type of location activity that takes place in urban areas —one that cannot be analyzed in terms of a profit-maximizing model—is 1 Edward Chamberlain, The Theory of Monopolistic Competition (Cambridge, Mass.: Harvard, 1933). 42 For a discussion of the shapes that the market areas might take under certain restrictive assumptions, see E. S. Mills and Michael R. Lave, “A Model of Market Areas with Free Entry,” in Robert D. Dean et al. (eds.), Spatial Economic Theory “(New York: Free Press, 1970).38 Urban Economie Anatres ae ° FIGURE 26, Euirian tx pt manos cme meson te location of pubic service facies. Thewe services are afte proved fom sevice eeer such a ety hal ehool, ie sttlons, cours police stations, public parks, amusement center, and $0 on, Sie sich fies, ‘eannot be Tocated in terms of protien, otber enteria must Be wb twied,soch os misimiing the distance thatthe puble mast travel 91 ceive such services, or maining he wsge ofthe fells, or mlaitz- lng the costs of providing some ghen level of qulty of publc serie. Different Kinds of pblic faces willbe inoeneed By diferent ene, For example the oeational aspects of emergency services such 38 fie and police stations and hospitals may be very diferent from thos for otter Dbl felts euch a8 pout offes, parks, waste disposal centers, and public housing" Some ofthe major Llaaces on public facility locaton bre clear: for example, fre satlons and pamary schools in some seas ‘must be loeated so Wat the tel dine fo ibe farthest client doesnot exceed given maxim, ‘While dare may be Sore concepts fom private sector cation mols tat are uel In enderstanding peli Icalioa deebions* the devciop- rent of the thcory of public fetes locaton bas Iged behind that of plate loeston, A major difeence ig that public facies focations i = ‘en jurdiction are chosen by a rebtively emtrabzed decbion-mabiog ‘authority, eg, the fire or police department ot the sehook dst wich lows the choice of any parcla foeaton t9 be mate in ight of tier sg tot et Teg a. Sone Raa Range ot nt GI ctr tpt ethan rR he ag MAIntroduction to Urban Microeconomic Analysis 39 adjustments in the network or system of similar facilities. By contrast, in the case of selection of location in the private sector, e.g. the location of independently owned grocery stores, the situation is characterized by a set of individual, relatively. more independent, decision makers. There exist many elaborations and refinements of location economics, which we will not take up here. However, we recommend the extensive literature on the subject, mentioned in part in footnote 26, to the attention " of readers especially interested in them. V. THE SPATIAL FORM OF URBAN AREAS The results of the interactions of the location decisions of households, firms, and the public sector may be observed in the land-use patterns in urban areas.** The “atmosphere” in which the separate location decisions are made is very complex, and, as Meyer, Kain, and Wohl have observed, ... the spatial pattern of a city in a free-enterprise society is the collec- tive result of a large number of separate business and household location decisions and transportation choices. These decisions are made in a con- text of and are influenced by economic, sociological, and technological circumstances, usually beyond the immediate control of the decision- maker. They are also constrained and, to some extent directed by, public policies—zoning ordinances, building codes, transportation policies, and the like.** * However, there does exist a general similarity of spatial patterns among Cities, as well'as some techniques of partial analysis useful for predicting and understanding them. An early technique, developed by Von Thiinen,*” predicts a series of concentric zones centered on a city or market in which those products with higher transportation costs are located nearer the city. The market is the mechanism by which land is allocated to various uses— the firm (or activity) that values the particular site most highly and is will- ing to pay the highest rent receives use of the land. More recent studies of the spatial structure of urban areas** have attempted to understand the 45 A somewhat different view has been taken by Hans Weigman, who looks at each urban market as having its own characteristics that in turn determine the spatial form of the urban economy. Hans Weigman, “Ideen zu einer Theorie der Raum- wirtschaft,” Weltwirtschaftliches Archiv, vol. 34 (1931), pp. 1-40; and “Standort- stheorie und Raumwirtschaft,” in W. Seedort and H. Jurgen (eds.), Johann Heinrich - von Thiinen zum 150 Geburtstag (Rostock: Carl Hinstorfis, 1933), pp. 137-157. 48 John R. Meyer, John F. Kain, and Martin Wohl, The Urban Transportation Problem (Cambridge, Mass.: Harvard, 1965), p. 10. 47 See Chap. 3, p. 53. ‘ : 4® Among the more important studies of urban spatial structure are: William Alonso, “A Theory of the Urban Land Market,” Papers of the Regional Science Association, vol. 6 (1960), pp. 149-157; Eugene F. Brigham, “The Determinants of Residential Land Values,” Land Economics (November 1965), pp. 327ff.; Richard F, Muth, “Economic Change and Rural-Urban Land Conversions,” Econometrica (January60 Wikan Econom daly nyt of eur thst infuece te rae a ie of tise te, Inching cation of snitar goods and lope tnesportaion felis vlesmestl tatuet cb © ie mipehced gel he ep os Sins the alate wes ofthe es he diy, seo Ce tem of polation por qure sb once aon e's Met fade” it showa denn nya te itace om prey Ge atin eas serio en cot cn tg ‘Sntincion endo, eyo ts el In pce by conden he cots ad bets associ wie inoncions i cefenpae.tnaoy, eos tempt totaly eae a ti iy fancoos hats ety tcl to cots of eance, Th lasts ae snot th ‘aly of te eniooncn fn whic he head sss he toch tgs ac tbo ant seen. gure 27 b a Dow dope shoving the pecs by wih ul colon sated The wr lee ts of res dso een ste sth of chi en bang 2 ar pe a epee, {Slowiag ot presng oer cane fe fit ad of darn ae the om bur iseecton of cy fo wich oe on ey tf tacts lading the Inston othe ba of iat mae Of Sle sel esas ines for eh Ue pany eon fe ae deer, Reeth nd Goelopment fm for eu, a "Sic ea of seni ad ag eel nr facet feo ering Inport. Ret ns canal te eae fob elect Sse ecnied byte neato opr caso. fa eae lis wea ey aig sho a mento cof at hat a = feed fon Fre 27 os “esac fs" ae Ut wl tee Bilsednoretdy teow ‘Aer dsesming te chy Ua wich tw lata fem ten mot dectewitc win cy top tsps. Te eon fo ter nude esl o mi ad mst Cough ie tase tes netwogtssbe ad conetiadon of the mare fel whe Oe Ioket bps cue oh cig an ey tacts hat vas Instn prove ty labor Having aeed ee flrs apt eat fate ke hw aay be aie to hose mae win th ty ft {Sreton tt ateud be eaeabucd tat ow of ee tor wl Be ‘eooed I and pe to fms otto the extent tnt ad ces topo ah ack Fat, Cs eg Co TU 2 PIT Mh Sree ee RSL inn Naty The The nen iy ona ter Se Hey 5, eo (6702 Duy of te Utan Enevonmgn (kino Fs FORE WB) pe BS, fre eet dartlon Of oo ofSIntroduction to Urban Microeconomic Analysis 41 Decision factors Choice Decision factors Choice [ Nontabor inputs® Labor ; Firm > Narkets p> cy ‘Transport links Markets* Transport links* Labor Neighborhood Decision factors Decision factors Choice Firms* ‘Transport links* Households |S} Transport links }_ 5! city Ament Lol neighborhood Markets Markets Decision factor Choice pres Markets Neighborhood *Factor employed at each decision stage. **Second-order firms are service firms that are based on low market thresholds. FIGURE 2.7 A schema for location equilibrium of households and firms. firm’s production function in a distinctive way, the firm will have to con- sider this as well. Having located itself in the city, the firm now becomes a part of the given data with which the household begins its own process of choosing a location. The principal determinant of the city-in which the household will locate is cither wherever the household finds itself to be or, in the case of migration, wherever the appropriate kinds of firms are located. The differ- ence here normally depends on the industry and occupation of the worker. The smaller the industry and the more skilled the occupation, the more likely that the decision of what city to move to will be influenced by the spatial distribution of firms, The factors that influence the location of the household within a city will be taken up in detail in the next chapter. Here they have been re- duced to three: Transportation network characteristics, amenities associ- ated with each location, and the location of markets for both consumption goods and the labor services that the household plans to trade for income. The’ transportation network plays a pivotal role in this process, since its effect is to alter the isodapane map through which the transportation cost elements of earning and spending income are minimized. The location of markets inside the city is really dependent in an operational sense on how the transportation network is put together. The amenities associated with each area’of a city may be more impor tant than all of the other decision factors. Some of the goods and services that people’ wish to have, such as schooling and recreation, are parts of the amenity value of arly location. Since these facilities may be used exten-42 Uiben Economie dnp shy espe cos and from sho may be of rt dso, in ager estat are broken op oa ner ef ecpiioet ares it maybe tat the goaiy vf tone ef te ube ses eae ‘ary widely fom pce oie. Thetosthlé oy Ton ot ianage ofa ge sf sath sens, ad may te coerced nk Stier factors ely ater thas ces dtd eas es sith tisndaes os pot en "Onze the boustold hss tered ts lain od onc: hoe in the saneate have done so, sronderde fers an tea pesasy hogs het leans. A second-order fm one wh reuesely¢ ‘ehtely sll mate o operate ecu. Exams of ch fos ue ‘oct Sores, cating exablshmens, space ep Sms and etd Servis vento. Thess fim ted (ose therer ier ee fo ‘eMbooods that oft a market ol sic se fx profile ee tors. fa rally, Sra probibiy cold te aranged songs conte of tarde reshoso that orl oft abd stato Es eae srt cng convent ohn orange ot pods eal es that ae provided by commariy or gorood rae tay ly, we ever and we hal eoetn to ths termine. as ben noted tht, ina very paral se, pil spa pte fn te ve resale torte mes of scare Bons fo hist desis and eaaportton czen Woe te date par Herod atolomenrs sale fs rovp of 53 Amedsan era ks ees tha rentals make up aay eo 8O percent of tend wed ty pote sector acts Set esupy a seh scons 60 Feccent cf he aonpriate led we. Approtialy TO pees of Oe Sie a anyArerzan cy confined oes an een Hanbug fornd geal come fntse ptaten Ia Chg" ‘Azan te song opis sw yp wi rpc 0 een es ‘Se steer cents ie a propor of ad we beyond he fe from tbe Chlego Lanp apron 40 pres, wile sets ei trafery cco 90 to 38 pert oh land we De ste (Gieaty 5 perc ofthe aad ata ofthe Chiego rein fas wine fhermlezone) 4 “Tae foe of maximum over scesiity win an wn 2 the pac at wich the ppl of he rea eould ass wih est {tal mores ef travel The foal pit ten to bef te omens se, and appar fo have sie only a eel hr ase ds et Re, nt ten ite Ce seer ta Ua ramen aes PEST ERE Chars A tsIntroduction to Urban Microeconomic Analysis 43 periods measured in decades and generations. Related to this focal point are a variety of density patterns. One is that of residential densities, whose peaking resembles not so much a sharp, conical mountain peak as a cross- section of a volcano, with a crater of lower gross density in the innermost zone, preempted mainly by nonresidential activities.*? Density patterns, which can.be represented by.such descriptive measures as a density gra- dient, vary considerably among cities; yet they all show a consistent peak- . ing in the central business district and essentially a monotonic decline with distance from it. Irving Hoch points out that “some mappings appear al- most spikelike in form.”** An exponential form of residential density gra- dient is very common, and it has been found that larger cities have, in addition to higher central densities, lower (flatter) slope coefficients.°* The distribution of residential floor area is generally much flatter than that. of net population density (population relative to residential land). Total floor space, total trip destinations, nonresidential floor space, and Jand value data exhibit marked peaking in the CBD and a monotonic de- cline with distance from the CBD.** ‘There is some evidence of concentric rings of activity, with commercial land concentrated in the CBD and with scattered nodes reflecting shopping centers. Major concentrations of industrial land occur outside the CBD, generally close to rail and water facilities. Apparently there is also much uniformity among cities as to where the rich and the poor each locate. “The richest families tend to live in close proximity to one another . . . usually . . . on ocean or Jake shores or on moderately high elevations, in districts far removed from the smoke and noise of factories and they usually have the fastest transportation to the central business district of the city.°* The lowest-income areas are often located in the central core of the city, which was the first to be built; they are predominantly on one side of the city, depending upon the topog- raphy of rivers, lakes, or oceans. They tend to be where tlie houses are the oldest.*” New office buildings tend to be constructed and rented to the best advantage in downtown areas leading in the direction of the high- income areas,** : Interestingly, the patterns of land use, population growth, employment locations, and residential choices recorded in recent years have differed 52 Edgar M. Hoover, “The Evolving Form of the Metropolis,” in Harvey S. Perloff and Lowdon Wingo, Jr. (eds.), Issues in Urban Economics (Baltimore: Johns Hopkins, 1968), p. 249. 53 Hoch, op. cit, p. 82. *4 Hoover, “The Evolving Form of the Metropolis,” op. cit., p. 250. 5° Hoch, op. cit,, p. 82. 50 Homer Hoyt, Where the Rich and the Poor Live (Washington, D.C.: Urban Land Institute, 1966), p. 7. c 57 Ibid, p. 19. °8 Tbid,, p. 7. -46 ikon Eero Anite Tide between those cies that have strong highway ovectation sed toe ‘hat have transit orientation. Mepe, Kala and Wel coneade tht ik ox without mass tanst, American cides have been decectaliisg™™ “vooghout the Usted Sites there has ben a deine Ia the rest, at often even the absolute, importance of the central parts ef many wan areas Ths eeceataliatos, subutbanaton, decopceataton, gates ‘ot, o uibanapeal is consent with the analy of urban tropes tion'ia Chapter 4. Fist, however, in the next chapter we wil conse: fan analais of turban resident fd wse and Bousng chee Dewi fotianed by amps to apply some of the urban microeconomic rei developed inthis chapter to erban tansporation markets end to ata Isbor mache, 1 Meee aan Web op cp 10,CHAPTER 3 URBAN RESIDENTIAL LAND USE AND HOUSING MARKETS I. URBAN HOUSING CONDITIONS, DEMAND, AND SUPPLY Urban Housing Conditions The urban residential land and housing markets, by any standard, are in- deed very large; about three-fourths of privately developed Jand is being devoted to residential use in urban areas. Furthermore, the average con- sumer spends about one-fifth of his disposable income on housing. During the first six decades of this century, the percentage of Americans who owned or were purchasing homes has steadily increased, although there are indications that starting in the late 1950s this trend may have been reversed, Much, if not most, of new multifamily dwelling construction ap- pears to be taking place in suburbs and not in central cities. In the postwar peridd housing conditions in urban America have im- proved. The proportion of urban Americans living in truly poor housing has declined. Specifically, census data show that the fraction of urban housing that is below a given absolute quality level declined dramatically during the 1950s.? Between 1948 and 1967, nearly 30 million new non- farm houses and apartments were built, and 20 million of these were in tmetropolitan areas.* During this period the rate of new housing construc- tion outran the rate of population growth. While the population increase in central ‘cities of metropolitan areas was about 8 million during this period, new housing units were built at about the same pace. Since usually * more than one person lives in a housing unit, substantial improvements in - -housing conditions have. resulted. During the 1950s, 800,000 substandard * Harland Bartholomew, Land Uses in American Cities (Cambridge, Mass.: Har- yard, 1955), p. 121. ? Richard F, Muth, Cities and Housing (Chicago: The University of Chicago Press, 1969), pp. 124-125, 280. . an Netzer,-Economics and Urban Problems (New York: Basic Books, 1970),46 Uibon Bena Ants housing nits which either were dilapidated or lacked ful plabig oa ites, were demolished in the ental ees ofthe dozen largest metopeta st Although in 1950 roughly oae-fourh ofthe howstholds fa cent is Tired ia substandard housing units, by 1966 the number bad ead 107 pereent. Inthe same 20-year period, sate and local goverees vested about $200 bilion to improve the so infrasrcte of cies by Dullding schools, road, transit facies, bospitals, alpors, wae spy, and sewerage to inprove the he of urbanites, ‘Unfortunately, however, the inprowemeat ia housing coun Bat not benefited ubsnites uniformly. Althoogh ace the ently 1930s, when President Franlin D. Roostelt called one-third ofthe nalon Rowe, ‘much substandard housing bss beca demolished and about 800,000 rm rent, publicly owned housing units Rave been bull, mary poor people an panticlaly members of minority groups cootinue tole in poor Lowi. In 1966, 16 percent of al eentrality noowhits, compared with S pees ofall centrality whites, ved in sobstandard hoasmg" Ta 1960, 30 pet- ‘eznt or more of the housing oscupied ty nonwhites was stn Bowig ia very American cy whose population exceeded oneal elion, exept fn Los Angeles and Washington; and ta Negro, Mercan-Ameran 1nd Puerto Ricen neighborhoods, housing cosdlions were even wom At “Anthony Downs has concluded," «miserable [housing] condos ‘ot true of al inadeqnste howtng wats, but enough Amescans are uapped fg the hopeless desolation of such suroantings to const both 3 532 dal anda seione eccoomie and socal drag on oar alent soit Some Defitions Werson owing have dvd any specs eons of ters wh fs most sel fo hs typeof amas thy por. review of Oe Wi ons es ecto as ar bon eat Sevdiawn tener stocks fw concepts and beeen quay {ualiy Bove For or porporcs, we defo a6 te Hout sk ts fae ‘Spat tok ht acon or the porpee ot shes pose fndon Housing serie aa be ought of ay he Servs ind By Be tieottie sock “The sevice which re dese fom the tock ae wo dea onever Te quuity of host servis ped by Boeig oe ferme oe mes et of eof ink Gunty of sev bn vga concep lig fo oo on dena from a given oaniy of serie In aly, tse Oro dh ‘Rendon are at rn sepa, On ops ts te be eos rR, {tidy owes "ove ocd Rei Hong Goss x Remit Gorton “dre toe (tas a Me Bate, Bae= Urban Residential Land Use and Housing Markets 47 into a single measure, simply housing services. We shall use this concept throughout our discussion; however, although this appears to avoid the problem of separating quality and quantity, it does not. In fact, to use such a concept it would be necessary to identify the two elements with the same precision that is required of the disaggregated version. That is, for any given quantity of housing stock, determinations would have to be made of the size of the quality contribution, the size of the quantity contribution, and then some relative “price” between the two in order to build an index number that aggregated them. Aggregate Demand and Supply The aggregate demand for urban housing behaves differently in the short tun from the way it does in the long run. In the short run, both the stock and the supply of housing services are relatively fixed. It takes a tremen- dous effort and involves high costs to add significantly to the supply in any short period of time. Thus, in the short run, housing services are mainly controlled by the demand side of the market, with short-run de- mand largely a reflection of incomes and income expectation and of cost and availability of financing, In the long run, the aggregate demand for urban housing is related to the size and age distribution of the population as well as the magnitude and distribution of family income, and to relative prices of housing serv- ices.” The aggregate supply of housing is related to the prices and quan- tities of land and other inputs to production of housing. Until recently, the demand for housing services was assumed to be inelastic with respect to income. Empirical work by Margaret Reid and Richard Muth, however, indicates that “the income elasticity of housing demand is at least +-1 and may be as Jarge as 4-2.”* Muth also found that “the real-income constant Price elasticity of housing demand is about —1, though it too may be even larger numerically.”® Adjusting for the fact that urban Jand is used ° Edgar E. Olsen, “A Competitive Theory of the Housing Market,” American Eco- nomic Review, vol. 59, no. 4, part I (September 1969), p. 613. Olsen attempts to get around the quality-quantity difficulty by asserting that the market for housing services can be thought of as perfectly competitive and that, therefore, the price of housing services (either explicit or imputed rent) serves as the index required. Later in this chapter we shall discuss the rather widespread and important market imperfections associated with housing services. In that section it should become clear why the price is not a feasible index. *Richard F. Muth, “Urban Residential Land and Housing Markets,” in Harvey S. Perloff and Lowdon Wingo, Jr. (eds.), Issues in Urban Economics (Baltimore: Jobns Hopkins, 1968), p. 286. - = . * Ibid. p. 286, and Margaret G, ‘Reid, Housing and Income (Chicago: The Uni- Yersity of Chicago Press, 1962). pasate ®The relative price ‘elasticity of ousing demand, measured in various cities in which prices vary mainly because of construction cost differences, also appears to ae unity, Muth, “Urban Residential Land and Housing Markets,” op. cit.48 Urban Exon Anais for iter wes aswell as owing, Muth reac the eootson tt te tay deceit abn 078.8 ering the paris nto how sev, Mik bas estate tint for 1986 to 1960 bor abd ateals ech areted for sprany aaely 43 perceat ofthe est of hog servis, aad hat lel crs ‘tnoused to apposinaey$ percent On ihe sutpin of coset tums to seals ine produtna of bus, te esto soetaon land cost for eter boatng eat abou 05, “Tee longnin spgepte soppy schedule for elena strates p> peas fo be bighly prowl Dung mail pecs st eles wap nies poid to constction labor appear to ave lie relation to the new residential onstracton a paris ens be explled Oy fhe Bek Fat f toby ef Gms, into nd et ofthe balling fda, Eder touship between the incomes of contacton fms, and Scans fa oan pres. ‘Maun estites 2 lower Knit of the aupey lc for wun ad to be sbont-+12, on he ssumplen thatthe pep easy of when laod ig zero. He argue, “Since the total amount of lind ion ta ssicalaly Sued hr uppy cate ef wba aad ts aed smo at tbe agricul demand ete for abd efolows imme tt laste of urban fd soply i e neath of the epee demand atk foc land "The soply cure of uaa ride fd can be estate a 2 sinllar manne, Melb, using tis proce coostdes that the easily thang supply per wl of resdetallebd i about 414. He far, spe that even fhe aly frees Ind were pee ieta hange iS keesg paces te Hy to not aay Gom af tae ery Steins ov honog. +A deviancy of naa fr ree {Eile wel eg eoacesnal ten und wos out for the ead shay for appepie tna led sete fo ane wd preach ‘Epa wc fae eth ply ef wb ad™ Beiey, then, the aggregate demand for wiban bowing is rated 10 population size and age, family sae eistibton, income Teel and dis Dution fer fais, ad clave prices. The asgregte supply of urban ESD ete bane oe crac as Se beriS cea goer ace et Heotiectda je rotorcoama ReUrban Residential Land Use and Housing Markets 49 housing is related to the prices and quantities of inputs or factors of pro- duction. The most interesting of these factors is land, and we have noted that a large difference exists between the supply elasticity of urban Jand in the aggregate and that of urban residential Jand. This difference comes from the substitutability of Iand on the periphery of a given city as op- posed to its substitutability in the aggregate. Although these are the important factors that determine housing de- mand and supply in the urban area as a whole, additional factors affect the demand and supply in specific neighborhoods of the city.** The addi- tional explanatory factors needed to explain neighborhood housing demand include employment locations, availability of public services including schools, the quality of the environment both in social and in physical terms, and finally, accessibility to other consumption goods not included in this list, Perhaps the major influence on residential location decisions of house- hholds is related to’ the location of current and prospective places.of em- ployment. Commuting to and from work is the most frequent type of trip made from any household. As a result, it can be expected to be of major importance in the process of residential site selection. The availability and cost of public services also will influence neigh- borhood housing demand. When a houshold chooses a neighborhood in which to demand residential land or housing, it engages in an all-or-nothing decision with respect to some public services. Each neighborhood is char- acterized by some range of public services that are available to residents at a zero price (other than taxes) and that are unavailable to nonresidents at any price. For instance, if schooling is of great importance to a family and quality education is available only in one or two neighborhoods, then they will demand housing in those neighborhoods. In addition to the avail- ability of certain important public services, available only to residents of a particular neighborhood, the burden level of financing all public services in the neighborhood also must be taken into consideration. This requires information on the tax burden of property owners and renters in.a specific neighborhood. The strength of demand for housing in a given neighborhood is also responsive to the quality of its environment. There are physical character- istics, such as topographical features, landscape, and weather, and the characteristics of the people who live in the neighborhood. People tend to group themselves by their similarities. The selection of a neighborhood is also influenced by the access it provides to consumption goods and services such as facilities. For example, the sailing enthusiast who must locate in a very large metropolis that has’ 44 Richard Muth has estimated that the relative price elasticity of housing demand, measured in different parts and neighborhoods of a city, is about unity, See Muth, “Urban Residential Land and Housing Markets,” op. cit., p. 286.50 Uiber Econ Anat ‘single marina on fs ouskins wold prefer to locate bis resident at 2 marina i ready accesible. Some eighbaroods ight prove seat tse whch ttt donee re bay decade “This componeot of th demand for resents actos it kao “option dersand,” 8 notion developed by Anthony Downs!” la bi, ption demand reer to tbe demnd for avallabity of goods and seres whether they are consumed or ct. Thus households, prvculaly the ia ‘ites, appearwiling to pay for the vale of eran thot alerts. ‘Aa example might be the somewtat peter demsed for sore dst ‘ood waiversy by persons who wil ne necessary tei facies bat ‘who recognize the possibilty that they right. ‘Hams, Tolley, and Harrell have Cevelopal a model, ed on cone somzr demand theory, whch cosiers amenities as well tae xu 82 factors deterising choice of residence. Toa land valee pe uae fok seas exited from the appraisal of land values for te pups. Tis slo was separated into travel savings, ame vals, and apie ‘los, plus pasmeat for vies on resents land beyond he tare st ‘ngs margin. As expected, the Bighst postive amenity vale oor fer the son spo reside areas andthe hes cea vals ae oad fet ‘be eionsly run-down srea."™ “Another crpical sty has ben cared out by EF. Brigham. * We sspolates that resdetial fan ves ian stan sea are elated 10 the Danteuar ses arcessibiy,ameniy feel, topo, and cera ise fexzal factors including the way the ln is big aed Beant of serous tessorement cfu, elect quantnive pry vues ace used ia 2 Taton toa sample of land valucs in Les Angeles Cost. 1 found at sccesily to employment opportuni is postivey related to resent, ined vale, However te relrionshp sorties swamped bythe pre nce of low amenty levels earth pimary work ects andi dered ‘by the existence of satelite employment and shopping centr Inet ot sz the CBD. Amenities are appotinated fa tems of 9 surge tht ens he i of detng it inporemen, bye er ne the dweling ni suctare ina sve Boel Finally rs Lowry and asacstes ave undertaken a sty of demand for seta bossing in New York Ciy, empha cet eoakel asec 1 Ancry Down, The Fe of se Unrate POT (a9 MesUrban Residential Land Use and Housing Markets 51 Expenditures among households are found to vary mainly because of in- “come and location and control status characteristics of rental submarkets. Interestingly enough, age, sex, and ethnic background of the household head as well as the size of his family appeared to have only slight influ- ences on rent expenditures among households of comparable incomes who have housing in the same submarket.?” Neighborhood differences do not affect the supply of housing services as importantly as the demand. There are no reasons to expect differences in factor prices or in’ substitutability between factors from one neighbor- hood to the next in a given city. The differences that do occur are largely the result of intervention in the market for housing via building codes and zoning ordinances. Building codes frequently require construction practices that are out- moded, thus denying builders the ability to employ in one neighborhood technological changes they may be able to use in other neighborhoods in the same urban area. The result will be different supply functions for con- struction output. Zoning ordinances have two kinds of effect on supply functions. The most obvious is that by disallowing certain land uses in given areas they restrict the supply of land which is available to that use. This raises the price of land, and consequently of services flowing from the land and the Structures that can be put on it. In addition, of course, it lowers the price of land in the use toward which the rezoning has been aimed. The effect of zoning can frequently be overcome by the possibility of purchasing var- iances. Depending on the decision-making apparatus in a given city, vari- ances can be purchased (by expending the resources necessary to persuade the zoning board to grant them) at either high or low prices. Another effect of zoning on the supply of housing services comes about as a result of the detailed specifications for what is allowable in a given zone. Typically, cities will have several different types of zones for residential land uses. Each zone will allow certain types of structures to be erected within it and will exclude others. These specifications can be used in several ways. For instance, many suburban cities have used them to create a system of housing segregation by income (and therefore by race). Less explicity, these specifications often have the effect of preventing neighborhood development along opti- 19In addition to the volume on “Demand for Shelter,” the New York City Rand Institute has completed the following studies: Ira S. Lowry, Rental Housing in New York City: Confronting the Crisis, RM-6190-NYC, vol. 1/(New York: New York City Rand Institute, February 1970), 37 pps C. Peter Rydel, Factors Affecting Maintenance ahd Operating Costs in Federal Public’ Housing Projects, R-634-NYC (New York: New York City Rand Institute, December 1970), 74 pp.; and Michael B. Teitz and Stephen R. Roserithal, Housing Code Enforcement in New York City, R-648-NYC (New York: New York City Rand Institute, April 1971), 58 pp.$2 UibonEconon Analy a_i es he eg eos fr i aot Fut i sone co fr etonra whee tlk {tis ming gm To ef nr oes aa oh Scenic ntven opto Stn mnt wk re dna ise into sectndig of he ne of tg ie ty otal ssf ttl popesy whe eerie aa in'oo ttn wats pope wr we sey deny ied vig sua dt sn sn fe er na cts bead gly npnd pai a mg Steyn Of pac ers sere ey wali and ag ics bom ed eon ere Tier poery vat Hoes Mosel td Te Sef tay se he nny nota y= ony re aie. Thode al ty he peso fags er oc ‘Sate ei Oe wl be ae fe eas ‘nt Sat py oy bs Wh pty Soe Cee an Ue teat hse Moshe ed, "Sprout bolted obey Homogecns BL, FRAMEWORKS AND MODELS OF HOUSEHOLD RESIDENTIAL LOCATION DECISIONS" ‘The urban economist is intrested in how specie maet operate in allo- cating households to locations and eossumpaicn cf housing to patil ‘eightorhoods wth certain envroomeatal values. . “Our fs sep wil be to examine several approaches tothe ans» ‘of locational decison making, They were developed to reach several ob Jectves, bet all of hem have explanatory poner for residents location, In edition, most of them have implications for urban form end desiy. ‘Some of these implication are Sscussed ber, but fr the ast prt ee _meat of tem Is eft toa ner ection of hs chapter. So haat me Rare Bae apie ol blr aut doen dl Spi des Goon Ue tafe it oh sa rt SG See sete a Sis ERLE Miao ts Nee Ete. es Bont Ok EGU GIy us hte Ot amet a eet~ Urban Residential Land Use and Housing Markets 53 Land-Use Framework: Von Thiinen Von Thiinen more than a century ago derived notions about the spatial distribution of economic activity from certain postulates about economic behavior and the nature of space. He assumed the existence of a single, Targe city in the center of a fertile plain, surrounded by wilderness and devoid of navigable waterways. Under such circumstances it was shown that products with high transportation costs, e.g., fruits, fresh vegetables, and ‘milk, tended to be produced nearest the city and that other products would be produced in concentric rings in the order of decreasing trans- portation cost. The price of a product in the city was shown to be suffi- ciently high to cover, the costs of the most distant producer, including transportation cost. Less distant land was shown to earn a rent attributable to its location and equal to the sum of production and transportation cost to the city at the most distant producing location minus the sum of these costs at the less distant location.?* Von Thiinen’s approach can be readily adapted to help explain and predict the evolution of urban density patterns and urban form. Thus, the Central Business District (CBD) or center of the city replaces the role of the isolated city of Von Thiinen, and the land surrounding the CBD is used for residential and other nonagricultural purposes. The CBD is the point of maximum accessibility to all parts of the city, and producers located in it benefit from low transportation costs. Competition for the limited Jand in and around the city center results in those with large trans- portation costs or relatively small space requirements locating in or near the CBD. For households the CBD is the most important, although not necessarily the only, place of employment and the purchase of goods and services, and the cost of transporting people to work or shopping tends to be lowest close to the CBD. Not unlike business firms, those households with large transportation costs or small space needs locate near the CBD, and vice versa. Clearly, differences in land rents between any two locations devoted to the same type of use relate to the difference in costs—primarily transportation costs—associated with the twolocations. ~ Incoie-Related Framework: Park—Burgess Von Thiinen was concerned with agricultural and industrial location, al- though the implications for residential location are obvious. The first inter- esting effort specifically related to urban housing location decisions was suggested by Park, Burgess, and McKenzie in the 1920s," They noticed 223, H. Von Thiinen, Der isolierte-Staat in Beziehung auf Landwirtschaft und Nationalékonomie (Hamburg und Rostock, 1826-1863); also see Erich Roll, 4 History of Economic Thought (New York: Prentice-Hall, 1942), pp. 359-362. 23 Robert E. Park, Ernest W. Burgess, and Roderick D. McKenzie (eds.), The City (Chicago: The University of Chicago Press, 1925).44 eben Econ Anas that housing in cies teaded to be organized in concent roses, with ‘weather felis Hiving fn the more distant zones ad the oor fa the rearee zones, The expltnation fr this phenomencn was that there Was high income elasicty of demand for new housing. The mechani ty suggested to explain the stance of the Bigh income zone from the cnet, was that high-income people, wishing to purchase lage amounts of use ing and wanting this Rousing o be dew, economize on the pie ef lad ‘inorder to maximize the allocation to other elements of the Rowing ex penditre. They were able to economize on land by movlag tothe eer felaively undeveloped land because they were no Tonper ia competion ‘with Sem that requied land with high eevee ves, Ts theory fl from trace wih the discovery tht the predicted pattern of housing was ob- Served in vntsally allele, irespecive of whether they were grvigg. ‘Budget Consirint Modes Alonso, Muth nd Siegel ‘Two more recent models ar those of Wiliam Alonso and Richard Moth ** Although the two raodsl adress diferent pars ofthe problem of whoa housing, ty are quite comparatie. Each ahor looks atthe press of locaton scleztion as uly maximization procedure which I coastal by income, The theories difer inthe forms of the uit and bodet fence. ‘Ia the Alonso mode) the individual is faed with the to of tte ‘mining the Jcaton aed quantity of land that will maximize bs wlty ven his budget comtsiet Leng the vale of al goods eter than hous fing remsin fined the uty Gunction represets exsenally a tradeoff be- teen quantity of land (Lo sae) and dissnee from the eater, snce com ‘utig fost increas with ditane rom the center. Asincome creases ant sore of everything i consumed, larger ot ses wil balance grester eom- ‘ting costs. Sige pce per unit of land ddines as commuting cost fi ‘eves Abs, Lato ed Lead Ua Zeart« Gel Thay of Lend NRSC ie mle He seinen er ‘of Tant used i te ance af tat and from te erin, the comma Sy ERLE ha Sam acs te oe LSE Pets pee at Sit a me te Eso Sal Date iy eee de atin ae Set ae PU aT ave igen La BL Gece tame marge tera oe eat TESTE Gh RS Seats So eae ane See aia ace Wace mein ama ‘Seo Nea at te Alama mate comaig Gon enoneUrban Resldentlal Land Use and Housing Markets 5$ creases, people who wish to buy relatively large amounts of Jand will move out farther than those who wish to buy relatively small amounts,?" Muth’s approach differs from Alonso's in that Muth assumes that honsing services combine Innd and size of structure as well as many other dimensions of the value of housing, and he treats all of these as one entity: housing services. In additlon, he includes income as one of the determl- nants of commuting cost. The constrained maximum found in Muth's model represents an equilibrium location from which no move in any direction can increase utility. Households ave induced to Jocate farther from the center because of the savings available from lower Innd costs; at the same time they are induced to locate closer to the center because of the decreases in commuting costs available, The equilibrium Jocation is determined in Muth’s model by the land price and commuting cost func- tions at the point where the marginal decrease in expenditures on housing, is equal to the marginal inercase in commuting costs for small changes in distance, Both the price per unit of land (—Px) and the commuting, cost (74) are negatively sloped functions of distance, und the marginal price function has a steeper slope than that of the marginal commuting cost function, Figure 3.1 shows these two functions and the equilibrium soln- tion,?7 The Muth analysis assumes that the Ievel of housing services has been fixed. However, if both housing services and commuting costs depend on income, then the former cannot be assumed to be fixed, Income incren: cause the amount to be saved on Innd to increase at every distance, since the houschold wishes to buy more of the income-clustic good, housing services, of which land is a part, Ju addition, the costs of commuting rise at every distance as a result of Increases in Income and, therefore, time costs of travel, The change in the distance solution may be positive or negutive, depending on the relationship between the Income clusticiy of demand for housing services and the income clasticity of commuting cost. 20 'The distance response to changes in Income Is even greater thin Implied by the Alonso modct, which assumes commuting, costs are not affected by income. If in- come were included as one of the determinants of commuting cost (limewire component), then the distance one would move outward asa result of an Increase in income would be Jess, because of the Increase In cost of commuting ton more distant location, This, of course, is restricted to Increnzes In wage Incame; Jacome from wealth does not have a betring on hours worked, and therefore Incrensen in income due to increases in wealth do not affect commuting cost, 27 Note that If the household found ftself to the left of k*, a move farther out from the center of the city would decrenae housing cost more than it woul! Incrense commuting cost, ‘Fhe converse holds for points to the rlelt of k*. OF course, If household found Itself not nt k*, It would move only tn the event that the returns to doing so (ie,, discounted difference In net xavings over the perlod during, which the new and old houses would be sed) were in excers of the moving costs. Vor entire households, moving costs are likely to bo relatively high.$6 Urbon Econ Avayie a rainy FIOURE 11, Ditencesgerium oahowho 1 the formes Lge, as Math eset then a nce fa coe wl iv their cas arr tenet hows ge “This esserton fs supported in pat by research sls of ME. Bee, ‘wo found tat expenditures of chil sera Londen on anspor to work bas an income elit of shout 12" Tis cousin ia cam jucction with Mulls fading of leone eal of demand for bosteg pester an fends to cote Mats asertien Teo farer ses ate found the inesme elasicity of Rosi expedite tobe peter thar" oth the Alonso and the Math moss inal make tbe asturon, vigil made ty Von Thee tall be buses actis of ly tue load ata cmccsiolss plat i space and that oel eos regu for ogeal stances, no mater in wich dveoa ope mows. Malt at rolxes this asvmption and go doc Siege, wa aries te eontsoa ‘hat deasty pater: for cldes are gule wake thw geseted by Oe Eimpler Von Thisensype spproth, te, jobs can be anywiee nt ly, ‘esata be aeates™™ “Tie demand for 2 partaar maida loa, ascontg to Soh ts refed to sees, enviroanental ually (ly sooo a Acer ofthe aelSboibod, nate and svabli of poo ses TIME tele the Yao of Toe Set lx area Seon Now Bens? Eryn Ne ci abt EE aud Sie “penar Toes Reem How In A.C Hetero 2a Dd Dui Govt: Te Wray Cage os RY Seach Inrameropolitan Migration of White end Minority Group HoweE Urban Residential Land Use and Housing Markets 57 ~ . and amenities impinging on the site, etc.), and site characteristics asso- ciated with the location. A rational household will choose a residential location which maximizes its utility as derived from all three sets of char- acteristics, subject to its budget constraint. Site costs to be considered in choosing a location include locational rent at the site plus land value and Jocal property taxes, while accessibility costs include costs of transporta- tion, including commuting to the place of employment as well as transpor- tation to other locations in the metropolitan area.** The paucity of environmental quality data forces Siegel to simplify his model and consider only accessibility and site costs, which are measured with respect to a particular reference point, i.e., the CBD.*? The Siegel 31]£ accessibility, environment, and locational characteristics can be quantified and aggregated, a metric can be constructed completely describing the metropolitan area. The resulting metropolitan map has three dimensions, and every Jocation can ‘be described by a point with indices representing values of each attribute for that site. These values should be explained by a set of exogenous variables, e.g., income, locational rent, family size, education, ethnicity, number of employed persons, and the type of job of the head of household. The corresponding price structure is also included in the exogenous set, while the attributes of a site for a household are endogenously determined. A change in residential location, ie., intrametropolitan migration, results from changes in the value to a household of the attributes of a given site. The change in value is explained by the change in values of exogenous variables. This induces the household to move to a new location in order to. return to a utility-maximizing solution. 32 These two assumptions reduce the metropolitan area to a one-dimensional ray with the origin at the CBD. This formulation, while not useful for certain questions, is particularly appropriate to study the following questions: Why are people moving from the central city to the suburbs? If industry that employs unskilled labor de- centralizes and moves farther out from the CBD, what effect will this have on the residential distribution in the metropolitan area? What is the relative importance ~Pe a2 Pe 6 = : i £ & | Te,2 | | | 7 SESESEEEEEEncecEes Eoesseanes cassseeeeteseeeeeene cl neecieaas 7 u Distance (k)'” FIGURE 3.2 Change in distance equilibrium from in- come I to income 2.$8 Urban Econonie dna Pods combins and extends the Aloo and Muth ed by Both acesty and hig sees fae Anes iy foes ‘thus the houschold is assumed to derive satisfaction from corsuraing bots. Farris aly dy Uae ew emo ode eos not soe th lyse the C30, tl ‘set of choice variables facing the househotd. i ee “hs chee taal, whch se mid siutaneonly by te tustol eover let deiont an hows etioy Te eel wie ft the Fase chose lato at ane and woe In mating a dicion abot hog ses te one ics ‘Eng auner fons dle ctatecte Model tmplictions Jor Urban Form and Dery Pater cep de nan om ge peg my Sera te ney oe a ae Saeed pees Soc a mote dat whoa ae Ease ae oe SMR ES as ientida TL nwt met ene sc cue ca ee Ea ee Sacre ata esa cas ERLE NG Rah iy orale acme Stee DSRS ee est SADC EA Gis bb eat Siting epee Se ihe oe cy eget pone fa ae cin at ts rin Loge cet operas ee (ioc gullies te noc tm eta Spotl eeu i ela LSet» ey Sone Tin i ind om cn en 0 tcl SRLS AS Bee et orn ae ‘SUSUR a Sate es woe apartnbents, and the Tike, are found in the ecater, since they have very low POSSE TRE Sits ah pie io ee iit eee es TESUrban Residential Land Use and Housing Markets 59 and so fofth, are found at a distance from the center, since these types of structures economize on other inputs relative to Jand.** Muth has found that as land rentals, and therefore housing prices, de- cline, the output of housing per square mile declines. Muth discovered that if a price change is given, then the responsiveness of housing output varies directly with the ease of substitution of land for structures in producing hous- ing and inversely with the ratio of expenditures on housing paid out for Jand.°* As the city’s population increases, so does housing demand and, there- fore, demand for land and for structures which yield housing services. The increased Jand demand for housing is supplemented by demand increases for land designated for roads and commercial activities, which result in jand being bid away mainly from agricultural uses. Residential land rentals increase, resulting in higher housing prices to*consumers in all parts of the city. Consequently the rate of distance decline in housing prices is not affected if population growth does not.produce other effects, such as re- . ducing’ transportation cost. Since the value of housing produced responds more rapidly to the increase in housing prices in the outer zones of cities, and expenditures per person remain largely unchanged, population tends to iricrease most rapidly in the outer zones of cities, These decentralization tendencies stemming from population increases are reinforced by trans- portation improvements. Declining transportation costs tend to result in a decrease in the rate of decline in housing prices with distance. Muth has also presented some empirical findings on the pattern of urban population density. He found that population and car registrations per capita as proxies for transportation costs were of overwhelming im- portance in explaining changes in urban population distribution during the postwar period. The increase in car registrations per capita, of 0.26 in 1950 to 0.35 in 1960, can be interpreted to account for a decline in the percentage of an urbanized area’s population residing in the central city from 14 percent to 7 percent. This 50 percent decline closely approximates the actual 65 percent decline for urban areas studied by Muth. He con- cludes, “Similarly, the increase in land area of the urbanized areas studied averaged about 82 percent from 1950 to 1960. Of this, the increase in car registrations would account for an increase in land area of about 45 per- cent, while the urbanized area’s population growth would account for a _ land area growth of about 25 percent.’*** Muth also studied such indicators of the central city’s physical condi- 38 See Irving Hoch, “The Three-Dimensional City,” in The Quality of the Urban Environment (Washington, D.C.: Resources for the Future, 1969). 54 Richard F. Muth, “The Ghetto in the Local Housing Market,” in John P. Crecine (ed.), Financing the Metropolis (Beverly Hills: Sage, 1970), p. 441. 38 Toid,, p. 443.UibonEconoie daar . ion as age of te cata eity and is dling unit nd de ratio ofthe later that i dlapidated and (er) without private bat, aera pops ton dens inthe eeatal ely, aad the proportion ef enplapset eis fs in manufacturing, Of these, ealy the faction of dweling wis tata ddlapiated and (ot) without plvate bath showed a signa erelson (negative) with te relative rate of desie in population desl. Ths fac. tion of substandard housing, however, shoved an clea asoetatoa wie ‘central ciy’s share in urbanized ares populaon orth ater Ind ta ‘Als, the tration of substandard dveliags declined darog the 19505 {rom 020 to 0.11. Such changes fa dwelling condions would imply ‘etvalizaton. Fortis reason, Math Snds that mont of the eaburbenision ‘of population and gronth of wiban areas hat occured dig be 19505ea ‘be traced to transportation improvements and popolaton growth Tas, be concludes that thes is vitally no evidence to ecbstaatite the elie that ‘these phenornaa area “fight fem BEgh” MIL MARKET IMPERFECTIONS AND HOUSING PROBLEMS ‘There are a mamber of sources of iperections in houing markets. Among the innportaat ones are exteralirs and the existeace of nonconpetng groups. The extemal imperfeins in housing markets are normaly to- ferred to asthe “neighborhood eect” and poly aooat for the social prcklem of *poot" housing, The soncompeiisg groups market impede=- Hon pay accoans fot tbe scilprotlem of rica segregation In ovsig markets, a situation in which whites compete wil whites and Batts wih lacks at buyers ofhowsiagservixs. ‘Some aspects of the ares which are frequently referred to a5 probe fems are the feu, not of market impecections, but rhe ofthe oper tion of the fee metket, They may sll have udsimble resus, and tere fore be classed as problems, but they aze not doe to market impereeoas, ‘Aa example is urfan spranl Advaaes in the technology of wan tans (portation, aswel as Unease in eel types of trasport capital stock, ave produced urban sprawl, Whe sprawl represent a response chass ia tecknology, thre are aio seme ehanpes which bave been introduced cutee tbe marke mecha, Fox example, fs bihly wally that we ‘woald bave the urban highway systems developed by govermmental #F- es if automobile users Bad been allowed to dzectly and personaly eo- ate the funds that have gooe into chem, Stuy, the Kaancig of bore ‘ruling loans bad not been supported by the Federal Howsiog Ada ‘eaion, tis unlikely that he market mechanism wool! kave prodvoed tbe emp 40.Urban Residential Land Use and Housing Markets 61 same kinds and distribution of housing. These and other policy issues will be discussed in the last section of this chapter. Neighborhood Degradation ‘Urban slums mean poor-quality, substandard housing. Edgar Olsen defines a slum dwelling unit as one “which yields less than some arbitrary quantity of housing service per time.” For instance, one “might decide to call all dwelling units in a particular locality renting for less than $60 per month slum dwelling units.” Olsen goes on to define a slum area as “‘a contiguous area which contains a high (but arbitrary) percentage of slum dwelling units.”*? Another type of definition of a slum area is that it is a complex of dwelling units occupied by low-income families. Finally, Otto Davis and Andrew Whinston give the slum a welfare economics definition in which a slum dwelling represents suboptimal resource allocation.?* On the-demand side, a number of reasons have been put forth for the existence of urban blight, and for the tendency of neighborhoods to de- grade over time. They include the institutional environment and the income of slum dwellers. We shall consider a third, more general argument which relies directly on the idea of a market imperfection before we discuss the more popular views. it One type of externality is the neighborhood effect, which has been discussed in Chapter 2. The cost of information flowing between neighbors represents a barrier that discourages all of them from making investments in maintenance and improvements because, in the absence of such infor- mation, these investments are very risky. For example, in some circum- - stances no investor would be willing to improve his property unless some relatively large proportion of other homeowners could be expected (or forced) to do the same. The reason is that returns to this investment can- not be entirely captured by the individual but are spread over the entire neighborhood. Thus the only way for an individual to get an expected return from his investment is to induce his neighbor to invest as well, so that some of the investment that he makes, which yields returns to other people, will be balanced -by his receipt of returns from other people’s in- vestments. ‘These externalities act to make neighborhood degradation more com- mon than if they did not exist. As long as the information or the contrac- tual agreements are not forthcoming, levels of investment will occur that are suboptimal from a social viewpoint and they will be insufficient to maintain the value of propérties in a given neighborhood. / 87 Olsen, op. cit, p. 614. * Otto Davis and Andrew Whinston, “Economics of Urban Renewal,” Law and ‘\gContemporary Problems, vol. 26 (Winter 1969), pp. 106-117.2 UanEconomi Anais” Riad Math sopets an semaine dead expat ef eee ‘senso sons, He ss tt gy spread ef idl a eo ecg the sippy of fos de soe Cea en erect, reas af people tothe in such dwellnge For selon ssoaunded hoe, ingto be habia fe pec nal ae toda ee to tof ok suily hoong Te tou of nd so easing sears oe Foorauly hlg wool ele sed he xt peg boning fer square ml of int nex tal ele to Oat feed guy Nome ‘a ea We profecon of pega hostg ta be abe o& Preiable en und tsa areas Ios inesvely led tha a fom Faby lsd st of ter ou, sfc tt tas ees Sly protic to onsen at ppaton Ges ad mean Boul utter i of and ste gh, ot vernon eng eld contatite tgher ie ncn el dno tt ae sisundard™ ate serene ery ofS fre ease fe outs of ecrupnts Matt des Oat aie vt ow nse mt Spend nh ny on hang an ths yey ot oy aft ore ‘Par ox om ppm pours py of tg The eet rer teers lt aps fr be te eng set oe Sen aeadybule ens bce bu cy ames ee cing te {one demand or huang heel te or leben fal tit sctres:h ehgs Unt hemes srompibed pe ‘by cutting larger apartments up into smaller ones, and partly by allowing Sede qa torture ao sed cp - {Pore are thee map pallid Me temp to expla et ‘ence and exteat of slums by reference to supply factors. These include the Sie tun ea nos ern seh ers {diy ontige alow owing. a eae "Viton aca we couse ar mee ty which doaionn aes cate ted to ra en tcl me ce Say ny bet ere emo opin of reais bec, Ue nelle oe te pe pay owing, On of ‘major targets for renewal projects is low-quality housing, which often tends a satin ae tnd woh tens fo te val ler 10 Se tonboug dae of dowsovn are, When eazval propts Sy se hos near oer ie! ih ight owls wn commer begs, ne nro el ae espe re SE porate fd oe a The sy ed i realy bing tet, Bee he Erk they had oo ther coe Ava consequence of ee teaisg dome ute Cera Hongo iB 24, ists Ste Chet in Lec owe Mash” pct mn HS.Urban Residential Land Use and Housing Markets 63 slums, the housing market is confronted with a large increase in the de- mand for low-quality housing, i.e., the same type of housing that has been torn dowa. The ultimate effect is to raise the cost of low-quality housing and possibly to lower the cost of high-quality housing. Thus perhaps the rich are subsidized and the poor are taxed by urban renewal. The increase in price of low-quality housing cannot be expected to persist over time unless the long-run supply function for low-quality hous- ing is upward-sloping or tends to shift upward under capital stock conver- sion, which implies the embodiment of technological change in each new wave of replacement structures. Muth discusses how these short-run de- ficiencies in supply can be overcome through construction. Muth argues that as the price of poor-quality housing rises, relative to "high-quality housing, the quantity of poor-quality housing increases as de- mand increases. This increase comes about partly by more intensive use of the poor-quality structures and partly by the conversion of high-quality housing. He notes that if structures are not equally easy to convert, then as demand for poor-quality housing increases, buildings that are successively more expensive to convert must be used. Thus, even after there has been an adjustment to a change in demand, the relative price of the poor-quality housing would be higher than before, and therefore the earnings derived from the poor-quality housing would rise. Muth concludes that “previously exist- ing slums, then, become more profitable to their owners as the land area occupied by the slums grows.”** Even though slums may exist principally because of low-income hous- ing demand, two issues should be considered. Other forces may contribute to the existence of slums, and the private supply may overreact to demand for poor-quality housing. Muth found that only age of dwellings and a measure of population turnover had significant effect on the presence of slums. ‘ In contrast to Muth, some writers believe that a variety of factors, such as age and obsolescence, spread of industrial and commercial firms into residential neighborhoods, shortage of funds for investment in resi- dential real-estate, lack of proper planning and regulation when these areas were initially developed, failure of local governments to supply Proper kinds and amounts of local services, etc., have increased the supply of low-quality, substandard housing. Furthermore, property tax features, federal loan subsidy policies in recent years, the intrusion of manufac- turing plants and other nuisance industries into good neighborhoods, and the availability of new, relatively inexpensive housing in suburbia have made difficult the redevelopment of older properties and neighborhoods so common in the center of the city. Of particular ifportance in this list of institutional factors is the effect “* Thid., pp. 446-447.Urban Econom Anais of cure taes, Propny tae ae bated on etimated nuke ve land sod structure: Onc of el ete are comet) inde les to minimize he markt ve of ter bldngs i ey ae et oo sciouly atemping to sl them, The msi tats ycnionspctoo owing baldags t dtedorie apy. Ineme tne aoa Ge {statist ofthis is Roles for Cepeda fetal oct, ant {ax bent ingle by hem ndoes omer fo slow blag fo dee crate atte maximum rate This ealy pay baanced by pene longer ent nesea ite ase thatthe deine fa howing demand in elds paso ssl in th cet ofthe cy-has ted ee ung ones of exsing atria tighooods*” Atte sone Eo ‘iden of sac altro hae tended ty ve toe st a thir lcs have ben taken by lonecincame hase any o ee ‘ewcomer have ben members tne miaory oe ting is one procs by whieh hosing of ow gaat i nceaed fn opty. For any fad of boing ere ep thee comonett cf opp: ering ok which nce wis pect ops seco Steet, and comer er tere of fs, Whee sect te Senverie fem ene quay toaster (rly lowe gui), en ey sre beigfeed. Sins apparel eoprofableo sel crt egy hss ing, te spl ssh boog depends cate slot pen te and UE sete ete by abc sce of higher quai ca be coeed tow qaliy, When someting oscars ete fo ash cael srk (Goch aura renewal ee ced stone) orto rest owne by 0 Soweto ech lig co reser aed at veg ceeraon, then he pe of ow-eiy hosing rene Ts vers {Stan infceent inset of eomrenon by making comers ‘hich were prev eteeromis., atest Vein epgee seg nr o_o Meigen coe oo eae efron ces wenn ype ot Roca ei rat or Tue are Se ete pa oe SE dare St re etd la SA Se ee a es iam ey fe tec. ee 7. ty Goings dacosed oa the peeing geUrban Residential Land Use and Housing Markets 65 ing industrial segregation, Finally, some industries are characterized by skewed occupational distributions which would result in neighborhoods made up of families headed by people with similar occupations. Sometimes segregation occurs purely as a result of the economics of location and bears no implications about market imperfections, Some writers see all forms of housing segregation, including racial segregation, as stemming from these cost-minimization motives.*® However, such motives do no explain the extent of housing segregation that actually occurs, The simplest proof of this is the observation that prices charged to some people for living in a given neighborhood are higher than those charged to people who have the “correct” characteristics—occupation, race, income, or. whatever. On a theoretical level, one needs merely to recall that households do not just seek to maximize the difference between cost and return, i.e., profits. They attempt to maximize utility. If the char- acteristics of neighbors are elements in utility functions, then these char- acteristics will cause variations in bid and ask prices. It is generally acknowledged that racial segregation is a social prob- lem. Less often is it recognized that segregation by age, income, or other characteristics could also be a social problem. Yet, since segregation usually leads to narrowness of social contact, and has implications for the physical appearance of neighborhoods, other forms of segregation might also be considered problems.** It is probably easier to have social contact only with people who have characteristics similar to one’s own. Yet, in- come segregation, for instance, can lead to the appearance of neighbor- hoods being dull and repetitive. People with similar incomes tend to have quite similar tastes as well as similar capacities to own homes. An income mix in a neighborhood will lead to a variety of homes and tastes. * A number of different theories have been advanced to explain why residences of ethnic minorities, particularly Negroes, are physically sepa- rated from those of other groups. It has been suggested that since Negroes have relatively low incomes and their employment is concentrated in menial, low-paying occupations, they tend to be residentially segregated from others. Carl E. Taéuber and Alma F. Taeuber have studied this hypothesis and ‘rejected it. In their view little of the Negro segregation vis-A-vis the white population can be attributed to income and occupa- tional differences.‘ Using Chicago and Detroit data, Anthony H. Pascal reached a similar conclusion, ie., that residential segregation does not re- sult from such socioeconomic factors as white-nonwhite differentials in 43 Siegel, op. cit., p. 71. 3. sae nae The Rise and Decline of Great American Cities (New York: Double- lay, 7 : : ** Carl E. Taeuber and Alma F. Taeuber, Negroes in Cities, Residential Segregation, and Neighborhood Change (Chicago-Aldine, 1965).65 Vikan Economic Aalys > Incoms and wealth, fam se and compost esi ‘Working members. ” Perec tee ‘A tecond exlansion for esieatalsegegton of Nepes piso Jando nd real ate ages, who se fd to terch eager se + sono held by the et of the community fo Negoes ad ‘therefore to discriminate against them. If because of racial bias tandionts Astaed to rent or eal ett agents rested to sl to Nigro ott ino, thy woud ear les facoe han te property wood eer ‘se comand. Such landlords and yn este ge eld prota Tir bszess to thers bo 6 aot ave rach a aren Tybee minoiseanet comets a eecinly x ober groupe bosog Keo, dinner ie of oe ome may Ho ae Gly sin to te aenion theory ist grand conspicy teen, ‘wich asses iat landlords rel esate ent, monger an Sscited exmomicsctom combine lo a grant eof tap pes irom ching Nepros aad oer ete rnaes haber hosing pees. “The ourdain of tis arora ato ended fase then of ceonomie ots revgoct te county would Bae to jn and enter colle Sire apoements It shood be max colo ora sd pole sch an Beyeement coving nerfs ces ugh Wena, 20d Pita a tines of adverie mathe! condor the enpatien shod Be pest fos to Negros at loner, tl prise, pie aad wreck theagrement Sooeat more die tos ae th eves of Gary Beker and Matta Baley** Beckers ory of inane tos ote tn tw wi be wing py a eo Ie sce was, Tolgy to Ine among wc The reo swe ree? far of 0a fad personal implications ae well as cconomie loses hlely to result from the fnox of mioiies into thelr acghborkoods, Whites fear not only that. ie ety of nonwhites serioly danas the sci eas of seighboriood, but tbat indoces many waite fails to rove out of th eighborhood and thus dicoptcoablhed associton pater Ta nde tion, whites fear that property values ia Ur acighberbood wil dele ‘nee minority group ze permited tener. Gitte Bren sp So aad Alege) Bey Nee on fhe Emo ‘Retdemat Zea sehemena” Lend Economic, wt 39 (AMESE 139) Ig eset reg Yer nd Ree (By Cals UseUrban Residential Land Use and Housing Markets 67 This fear would lead to whites consistently outbidding blacks for hous- ing in white areas and the consequent preservation or extension of segre- gated living patterns. Unfortunately for the theory, segregation can also be explained by the opposite phenomenon, namely, that blacks are consist- ently willing to outbid whites for the privilege of living among blacks. It is therefore unclear whether the higher-bid type of hypothesis is evidence of discrimination of whites against blacks or of biacks against whites, un- less one assumes the blacks’ effective demand for integration is less strong than that of whites for integration. However, it seems reasonable to assume from-all the information we have that whites discriminate against blacks. Bailey looks at the logical result of inclusion of race in utility func- tions.*° He develops a model in which residential segregation has already been achieved, with one section in a city allocated to whites and another allocated to blacks. His aim is to answer the question, What will be the difference in price of housifig, if any, and what can cause prices to change relatiye to each other in the two areas? He assumes that whites are willing to pay extra to live away from blacks and the blacks are indifferent. Four housing prices could be generated in such a model—prices to blacks and to whites-in the interior of each area and at the boundary between the areas. Since blacks are indifferent, the boundary and interior prices to blacks are equal. But since whites are willing to pay a premium for living among whites, the price to whites at the boundary between the areas will be lower than the interior price to whites. If, as some people have as- serted, blacks pay more for housing, then at the boundary the blacks’ bid price will exceed the whites’ ask price; and if real estate brokers are ra- tional, the boundary will expand into the whites’ area. This process will continue until the boundary price to whites rises and the boundary and interior prices to blacks fall so that all three are equal. At that point, however, interior prices to whites will be greater than the other three. This seems inconsistent with the assertion that blacks pay more than whites for housing. Another way of saying this is that even if it were the case that prices to blacks were higher than prices to whites, the situation would be unstable. The only stable equilibrium under Bailey's assumptions occurs when prices to whites are higher than those to blacks—consistent with the prediction of Becker's model.** Social, personal, and economic concerns of whites vis-a-vis the entry, of nonwhites into their neighborhoods can bring about “tipping.” Tippinks is said to occur when a recognizable new minority invades a neighBor- 50 Bailey, op. cit., pp. 288-290. er 5The evidence of higher prices to blacks and Bailey's conclusion wfhigher prices to whites are’ not necessarily inconsistent. The apparent inconsist@&cy could result from a chronically greater rate of expansion of housing demany. of blacks relative to whites. The differential growth in demand could comeggither from greater rates of immigration of blacks than of whites or from greater it eat income of blacks than of whites in the Presence of income-elastic demand {c(68 Viker onal Anals pte wen rt vid eg es sting. The shies" deparice may, but heed not, Be I pasts eed de Fare ee eae Pa Ge ed by tin nal ean einen ed Sion Vanes Crean nua Sonu eid eos Sy Berane ag Mee sin 2 Samael pees a ce dt Spa hori foul cpa ws eager ee tel cata ee ye aaah cae Cat's pret ntl fn oc ce ee riper Oo ena oes te es wie ee Seen tept tin ei enn ete beacon econ a whe ances irs eel ane er foarte a ae eae eee are ot ee ern a cee Pore perience tonite yl cts ws iy ot tas sy SE ee ae Samat Te ial etinel te nln baw gigi ak Pa pepe ple pagar gd peered Se ee ee teas ook con Dak sores no ely ae at ae reba Sn a canes omy ge Tae ee Ge ncaa er at cate ame rea a Mor oon to ee a rain pee a iets ne i a et arco oo eet ptoneas ; Fetes pea nemytconeto cn a Nahe Ce a eh se frame money ys Do at a a a ee a cee sj cet i’ ie tion te BEE prose best nt etre Pn Ce eee er cam uecmcst-Te Hpeeaneiialir Sr Ricard EHfoRe “the Yataien of Popatton Deny eed Te Camones es FRE Sheen eon Sec Mon aod Proceeding aUrban Residential Land Use and Housing Markets 69 furnishings and utilities when they are part of the agreed-upon rental pay- ment. Since a larger percentage of nonwhites than of whites live in rental housing, this may bias the results. _ Ina study of south-side Chicago, Muth found little evidence of any appreciable price differential,°* and Martin Bailey found sales prices of single-family houses in the Hyde Park area of Chicago lower in Negro than in white areas.** Jay Siegel estimated separate demand functions for housing by whites, blacks, Orientals, and households with Spanish surnames. Independent variables were rent, number of rooms, and type of structure. The estimated underlying behavioral relationships determining the demand for housing services were found to be highly similar for white and black renters but not for white and black homeowners.®® Furthermore, he found that an equal percentage increase in the quantity of housing consumed, -measured in terms of the number of rooms, is associated with lower percentage in- crease in rent for minority-group households than for white households. Should the number of rooms in a dwelling be a good indication of housing quantity, this result is inconsistent with the hypothesis that minority groups are discriminated against in the housing market. Finally, an increase in the quality of the dwelling unit, ic., a newer structure, is associated with a larger increase in rent for white than for minority-group households. The coefficient of the age of the structure for whites is almost twice that for minority-group households.’ IV. POLICY APPROACHES We are now ready to apply some of the concepts and theories developed in carlier sections to a consideration of urban housing market policy issues. Attention will be paid to policies related to market imperféctions—neigh- borhood degradation and housing segregation. Then we will turn to policy consideration of urban sprawl, which can be said to have little relation to market imperfection. Policies to Combat Neighborhood Degradation . Poor housing, urban blight, and slums are the result of a combination of factors. It is useful to distinguish between income phenomena that con- tribute to the existence of poor-quality housing and slums on the one hand, and high cost and limited-supply phenomena related to market imperfec- tions on the other hand. With this dichotomy in mind, we will discuss £5 Muth, Cities and Housing, op. cit, pp. 238-239, 280. 5° Martin J. Bailey, “Effects of Race and Other Demographic Factors on the Values of Single-Family Houses,” Land Economics, vol. 42 (May 1966). pp. 215-220. °° Siegel, op. cit, p. 71.70 Uren eno Anaya pots daigned to reduce substandard hows. re Inenentceaatnpocd guanine he stent tat low come gray contibus to ppl bg under abstandard housing conto plies dsp to here eek cot would prove hosing. Telco ety of demand han, ing serves prise an ideo the efecnees ef sch pales Ig clasiciy i ow, ten he housing puns wt be ley Sa Red Muth and Maruree Red have toned atthe osone ue hosing i somewtre btveen 1 and-# 2° Honeree Dek Newer oe tans tat bowing savers have 8 lon tcome asl” Avia oe ence binconsese ‘ven if the laconic of howog i Urge than ey, ples designed to enhance te lcomes ot ln nto prongs face Sane ot istic Should ome inreaes be susan and ren, ae fears of exsn supply of middeqoliy boson sap pis ea fe apeced, Puberee 8 vary hatteona and ie nein Se Tily fo coma imeretors ofthe masher Ost pee ein ‘oops of por howshols fom pting tier town at esol pos, ‘ier impeectons rake oppadag of sigiboiced cosy an etre altel test "Urban America nthe 19605 undevet profound popu ngs tha promise fo comin othe 1910 ay ena ee adoag 1 the 31 gst In the Unicd Sates, fet popaation fae cade of he 196, whe cuba goed popision Ae a cowpeas, whe aot tmsropolita subi sed moe oui a fo ose el ose Pom im: mst eel cles do nos Ove bai probem 6 era es Instat elecine demand to sopponadegete maisesmce of cl Tnleigy, en Lovey fas fund tht in Now York Cia 1965-865, a Hest 80"perceat of land loses mere ia bags esd a er {ound or detecting bat not apisea™ He ao Tod at eg tied maisenance cot of esl hesiag neesed more pi than de ibe rents trans ere wing orale fo pay. AS tl redord ‘cetlny undercasined binge and ea etna, ‘Unde such chersunces ¢atcoods more sleet, come Polsy sugges at Le alg te eal nome he poor hough et Inow or eres Unie gene acme sepplmesy rot FF thes ae earmsted for hosp aod etfs wl be wed for pose opts of the come ebay of cama fr bowsig In soe, 21g "Uoee Rn ant Hing Me op a. 26 a Fike ets se lee dune fr tmeone ten Et: 4 i Spree Pas se em a: “Ra Ra aos) HD,Urban Residential Land Use and Housing Markets 71 rent supplements provided to poor families more directly enable them to live in-better (or, at any rate, in higher-cost) housing that is otherwise beyond their economic reach. Rent supplements can also counteract hous- ing stock deterioration. Federal rent supplement programs, first enacted in 1965, require eli- gible families to pay 25 percent of their incomes for rent, while the federal government pays directly to landlords the difference between the rent and the tenants’ payments. The supplement is directly tied to the family (size, ete.) and not to the housing unit. Private, and not public, groups build _ and operate these low-rent housing units, Since rent subsidies earmark funds for housing, some inefficiency in resource use’can result. The poor are not only poorly housed but are also poorly clothed and fed. On the assumption that the poor know what is best for them, it could be argued that unearmarked or general claims on resources would permit them to purchase those services in greatest de- mand by them—which do not necessarily include housing. Also a variety of cost and supply policies can be adopted, designed to reduce urban blight and slums and to upgrade urban housing. They can entail reducing costs of housing services, reducing supply of poor housing stock, or increasing supply of improved housing. Some of these policies can be supplemented by selective income policies, e.g., rent subsidies. Cost- reducing policies include cheaper and more readily available credit, lower land cost, Jower construction costs, and tax policies designéd to reduce the tax burdens on investors in housing and housing occupants. In order to provide more readily available and less costly credit, a number of tnortgage credit policies can be used. Government, especially the federal government, can guarantee or insure individual mortgages written on far more generous terms than is conventionally possible. By reducing the risk of lenders, interest rates can be lowered and more credit made available. Furthermore, the government can borrow, at substantially lower interest rates, and relend its funds at these lower rates to individual borrowers and builders.°* Finally, government can lower interest rates be- yond those made possible by its borrowing capacity and further subsidize interest rates. For example, the latter policy was followed in sections 235 and 236 of the Housing Act of 1968, which provides for federal subsidies that, at a maximum, reduce the interest cost to the equivalent of a 1 per- cent mortgage. Tenants pay rents equal to 25 percent of income and home- owners make mortgage ‘payments-equal to 20 percent of income; federal subsidies make up the difference between the amounts required for the actual mortgages on the new housing and the rents so established.** °* The reason why government can’ borrow at reduced rates stems from its strong Credit pgsition-and the fact that interest on state and local government bonds is Qxempt from federal income taxation. + Netzer, op, cit., pp. 89-90.72 Uiten Beonomie drys ating mong it rable nd at ows st ate, Aitorog tds ecs Pada ol toag te oes oe ‘Srl pens a aw pnt or masse gS tn tan yore wld Ts wat cn be naar ote isgutenreney py ama ‘Ainge aout oe nee eet Spee ol de cow ot beag ss, to an deed Leal ose pecs ise nt ae ne oer x tps conned wi ined sone dened can ok ck Th ct ees fos eb wap oe aster opry tes wf Fail nities Prt, ‘NB tn ove cour fae le ete cael ‘hort oral es fn ede einai [Sat prem colt ped busy dees ed ‘bo: ty fate pest sg st em ester co. A igi Nala Cen 9 Gen ebm hs Sb aad is 1s pets” Deblog and huing ng c= cadets se Bley tad ey nies bone baw Eevee cg St Sk Sooe tung eb t osdcdt pe ey fe fee has bora flout by vied ote apee ing te Sod coaacen Pett kw be bat 20 lr sre caer esas ane bp of opty oo rosy SS cit cone fr bene lyn ope Shale dg See: npn em, ese Pach cata a sanded estcon " ‘Finally, we can consider taxes, since they impose beavy burdens on soa stn hs en Cae ne eh Pe weeks Cans otis Ge foe 3 eto comune ti fo hoe asi of i ral Te rege ap Bets apetehlng op 3 pee aa ina es Rarices ee Get ite tat ad Clo td Ore. No SONS LS Gh etme tocar ce oak ere ‘Whi pepe to be te pny cot neg, fedent cae ia are Siena tae sea Be is Ay oe oe se ters onnererrledousng tn sburbn ares, wich ely bees Srna pele he shen et beeen co ose "EL oat, dat an eos sty exe et a Noe Tot Hd ear te te Tle le GIG Pet eee ‘Heard wal lie Ss of Operason Balt of hr Onde of Eggert dete vlasinn (a8) potUrban Residential Land Use and Housing Markets 73 households renting housing in the center of cities. Therefore steps could be taken which would lower property taxes on center-city properties. Then rents could be lowered and housing consumption expanded, particularly if at the same time middle-income households in the center of the city were to demand higher-quality housing. As a consequence, housing formerly occupied by these middle-income families would be vacated and become. . available to lower-income groups. Two tax policies are possible. On the one hand, an across-the-board reduction of taxes on center-city housing would provide an attractive policy, ‘ with a minimum of distorting side effects. On the other hand, special types of housing could benefit from reduced taxes, as is presently done by ex- empting from property taxes low-rent federal public housing and, in New York State, state government middle-income housing. The latter policy is - selective and tends to generate distorting side effects, likely to interfere with an efficient housing market. Furthermore, property tax laws could take into consideration the desirability of not punishing those who ‘are improving and upgrading their property and thus contributing to the gen- eral improvement of neighborhoods. In addition to these changes in property tax policy, reforms in federal income taxation are desirable. They should go in the direction of reducing the discriminatory effects which favor rich suburbanites in owner-occupied homes and instead particularly reduce the burden on poor renters in the center of the city. So far we have been concerned with policies designed to reduce the cost of housing mainly in city centers and, in doing so, to improve the supply of better-quality housing there. In so doing we would combat urban slums and blight. However, a further policy would be to reduce supply of poor housing by either increasing the cost to private firms who produce poor-quality housing or by demolishing poor-quality structures and re- placing them with upgraded housing. However, a policy to increase the Cost to private firms of producing poor-quality housing is unlikely to as- sure low-income households better housing unless such a program is com~- bined with rent subsidy or other income-enhancing programs. Otherwise, Price increases for poor-quality housing relative to good-quality housing are to be expected. ft Not only can tax policies be used to raise the cost of private firms in Producing poor-quality housing, but also stricter enforcement of building and occupancy ‘codes and public receivership of slum dwellings can have similar results. But in all cases such measures tend to reduce the earnings of poor- relative to good-quality housing. The result will be fewer dwell- ings being converted to poor-quality housing, reducing in the long run the °° The federal income-tax advantage of home ownership stems from the tax deduc- tion feature of mortgage interest and property taxes in computing federal income - taxes, .74 Urban Econ drags housing opportnites for the poor unless supplemented by ani ssbigporn. by aa tree, at poten exits in rian to demons, ep, asd federal urban renewal pram. Soh a progr Mass face subsandand housing ui I cight fore lovaneone bose ase xeric Would tae ied in Ietpeate,poraetiy aig teks tno into eter hon; but mere iperat t ai fe he ‘copy rach ass with owe ptsas pr ely tad eee the deeraten of such housing, The env eres fom po oc aualiy housing wil ndue propery owner ofthe iter to came ‘poor-quality outing. In this aanser the supply of substandard dregs Wal and to ierese and new sms wil per est Bly tev ae Depeaing onthe oss of cones, demain might ed tose eda ate foto of poor ay bowing tn ie Peo oe hal hosing would da, por Rosco wight end vp ving oot singers snd (or) peer poverty anor ts plicy of moan srs so be flowed noi nord wile fo Bud new hosig for lowsncone ou Bore i do owing i tom down, We ight begin by Euing re owen bow ing on perp vacant Yan, sil eos to coreorenied tranortte, To ths manner te would eave one. see We wed fain trom purchasing andi the Geet sas ht tay ao en {he highest et sed teenie of capainton ef ft earings HP Proper wate por ae Having bl low-co outg fa ep as Ed toed ito cm tz poor Fwschads fom the Sms oe pet oul tend to fain pice snd pea prone of sen 2s ae At lower cost. Moreover by provciag ew Rousing fortwo ie en art incor ae som dels cold ve fo ter ss Ing eater and wth let comer tan if Ovelings fn which ey Te vere demas” “Footer pcs have been propor to hose the fain who wt taplced asa ing Comoe. One 2 "Wl oe” sty st {Sct me hvsg eae sear the Rowing to be rego, Rens of {he lnar cuit more ito te mabe wie teporanly wl hye tum tothe new hosing. These mobbs hones col te moved fon it {Erne site to he he The sboncoming of sch 3 pot He te demolition-rebeilding period is 100 fong—on the average, about sevea “The scond sey that hus Ben sped cl fo te eo lag “erry way tin” ing pro on ocant seb Dapscd cot acy hoch wei oneopy hese wits eal te vit Re Tae, 4 Pe Un enon (no eM Boren lvne tart Resase Hoong Gat” om te fp M16Urban Residential Land Use and Housing Markets 75 ‘molished dwellings are rebuilt. However, displacing en masse low-income households temporarily from one spot to another has proved to be impos- sible. There appears to be much resistance against moving from the core city temporarily into the unaccustomed suburban envirunment. Finally, policies can be adopted that increase the supply of improved housing, be it through public construction or rehabilitation. Let us analyze the case where government destroys bad housing and constructs in its . place improved housing equaling the number of dwelling units demolished. In the short run, if this public construction was unanticipated, the quan- tity of improved housing services consumed will increase. However, if the market for housing services were perfectly competitive and had been in equilibrium before the public construction of the additional housing, in the long run the consumption of housing services would not increase be- cause of this government action. It would increase only if the public hous- ing activity should be combined with rent subsidies so that both supply and income forces would be at work.”? In addition to rent supplements, it might be necessary to provide “dis- placement grants” large enough to cover most, if not all, of the dislocation costs of poor families to be moved from their slum dwellings to improved housing. The Highway Act of 1968 authorizes such payments for road displacement, and the coverage of the act could be extended to all public programs. Altogether, it appears proper not to rely on general income-increasing policies to the exclusion of other policies. Richard Muth has proposed such a single-minded attack, while Dick Netzer favors a broader avenue of approach when he states, “A wide range of policies, new and tradi- tional, each of them having a modest impact on the underlying problems, seems necessary if there is to be a massive overall impact.”7* Policies to Combat Racial Housing Segregation Various policy approaches are available if we are to attain racial desegre- gation. If one concludes that segregation results from income differences rather than racial differences, then some of the policy approaches to prob- lems of neighborhood degradation are adaptable in toto. Alternatively, if one concludes that the problem is a manifestation of racial discrimination, @$ most economists do, then there are two ways in which governments can intervene in the housing market. Subsidies can be offered to whites to . overcome their apparent dislike of minority neighbors, or taxes can be imposed on whites who prefer living only among whites.”* 7B. O. Olsen, Do Public Construction and Rehabilitation Increase the Quahtity of Housing Service? D-17927 (Santa Monica, Calif: The RAND Corporation, 1968), 10 pp. 73 Netzer, op. cit., p. 197. 4 Gary Becker, The Economics of Discrimination (Chicago: The University of Chicago Press, 1957).16 UibanEconome Anais a eee cee a et eg tt ne eure eye aoe ir meat et se ree tet oat ee ig nies fe ter onion: We reer, Neen elite ivi coeeneyie i eee ne ern pa he tren rere hese iin ld pt seg nm crore een ees ramet tage cers mee it. Rae Hen to ne ep ee ey eee ere tases ae ein gw ay oe 0 sce tne Re ote Sop re ees pee Het eer fod ereaheretn ane omntertad ie ees tt ad ee cco sic engin ree ee bones eet Shee fatt ans este Sears ce tint rea ac cn

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