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Urban Economics

Joseph I. Daniel
Professor of Economics and Legal Studies University of Delaware

© 2009 Joseph I. Daniel

Office: Purnell 409 Office hours: Monday, and Wednesday 1530-1630

Contents I. VIII. X. What is Urban Economics? Development of Cities Agglomeration Economies Location Models The Urban Structure Land Use and Zoning Urban Growth Transportation Housing Education Crime 1 ii . III. VI. VII. V. IV. II. XI. IX.

and education level? How close are their residences? Where are the nearest park. It has applications to nearly everything you do. 1 . but you get the point. and electricity? What are your neighbors’ incomes. Where do you live? How much is your rent or mortgage payment? How big is your residence? Where do you get your water. and library? Where do children from the neighborhood go to school? How do they perform on standardized test? What is the student to teacher ratio? How do you commute to work or school? How long does it take? How much time do you spend in traffic jams? Do you work in the city or suburbs? What does the city skyline look like? What is the tallest building? What are the main industries in your area? How many competing firms are there in these industries? Are they growing or contracting? Do you make more or less than the average for your line of work? What is your chance of being the victim of a robbery. Urban economics studies what brings people together to engage in activities. I hope you are a little surprised and curious about how economics can apply to all these topics. burglary. heating fuel. An urban area is simply a geographical region with a higher population density than the surrounding area. Urban economics has some characteristics that distinguish it from many other economics courses in the undergraduate curriculum. assault. race. or murder in the next year? What sort of night life is there in the area? Is there live theater or music? Who is your favorite sports team? What sort of goods and services are available locally? Where do you shop for big-ticket and up-scale items? I could go on. grocery store.Chapter 1 What is Urban Economics? Urban economics is really the economics of everyday life.

Location (land) has value based on its proximity to other locations. As firms serve larger market areas. are usually treated as though they under 2 . while microeconomics studies consumers and firms that are individual decision makers. They are like “economic gravity” that attracts economic activity to an area to take advantage of enhanced productivity. Urban economics studies cities that are important entities for generating economic activity. Prices. This limits the size of firms with increasing returns to scale. 2) Scale economies refer to the property of some production technologies that require fewer inputs to produce additional units of output. Scale economies would result in a single big firm producing each good. In perfect competition. fiscal. and market areas adjust as part of the supply and demand process. on the one hand. on the other. and business firms and consumers. production is usually assumed to have constant or diminishing returns to scale. locations. 4) Macroeconomics studies national economies with control of monetary. We will study specific sources of agglomeration economies in later chapters. and trade policies. Many of the production technologies we study in Urban Economics exhibit increasing returns. 3) Spatial Models include distance and transportation costs as part of the economic equilibria. as the total amount of output increases. if there were nothing to counterbalance the efficiencies of mass production. scale economies may reduce their average costs of production but eventually the transportation costs of delivering the good overwhelms the saving in production cost. Firms and consumers choose locations and buy and sell goods and services that have different locations within the geographical region of the urban area. but are not covered by Macro or Micro economics.1) Agglomeration economies are a form of scale economies that work at the local or regional level that make production more efficient when it occurs in concert with other productive activities. National economies.

Of course there are also many similarities between the models and techniques of urban economics and the economics you have already studied in principles courses. 2) The solution to an economic model typically involves an equilibrium concept in which the economic forces balance each other so that there is no pressure for anyone in the decision maker in the model to change to their behavior given what everyone else is doing. producing at their minimum average total costs. various (often overlapping) municipal governments. Models help us to develop logical conclusions that are not readily apparent without using the precise language of mathematics.) We will adapt this model to include spatial features. Urban economies. There are no monetary policy tools or fiscal policy tools (deficit spending) for city administrators. Learning a model and how to apply it enables us to understand and make reasonable conclusions about new situations that arise. (Don’t worry we will review this model. you learned about perfectly competitive equilibria in which firm entry and exit drives the economy to a longrun equilibrium where all firms are maximizing profits. or left to private decision making. The model helps to determine what relevant facts need to be collected to resolve and issue. are subject to diffused control by many decision makers. 3 . 1) Economist use mathematical and graphical modeling to develop general principles that can be applied to different situations. Models also formulate theories in precise ways that can be formally tested against empirical data. however. and there are zero economic profits so no firm wants to enter or leave the industry.unitary control. They have little control over trade with other cities. In microeconomic principles. and the no economic profit condition is essential to determining how prices and land rents vary over space as firms enter and exit at different locations. Local control is often split among states. counties.

000 people. There are 1. The 2000 standards provide that each CBSA must contain at least one urban area of 10. The US Department of census officially defines an urban area as having a core group of census blocks with it least 1000 people per square mile and surrounding census blocks with at least 500 people per square. Urban clusters are urban areas under 50. Each micropolitan statistical area must have at least one urban cluster of at least 10. The Office of Management and Budget has additional designations based on census data. An urban area is a geographical location with higher population density and the surrounding area. This is a quite general definition that applies to virtually any concentration of human habitation. 4 . In urban areas census blocks usually approximate city street blocks. A census block is the smallest area for which all census data is tabulated. The term "core based statistical area" (CBSA) became effective in 2000 and refers collectively to metropolitan and micropolitan statistical areas. Each metropolitan statistical area must have at least one urbanized area of 50. In particular the concept of comparative advantage plays an important role in the development of urban economies.371 urban areas and urban clusters with more than 10.000 or more people. Overview of Urban Areas Let’s start with some important definitions and then proceed to some descriptive statistics that characterize cities. Urban areas are further classified by size.3) Trade among urban areas has many of the same features as trade among nations.000 people in the US. An urbanized area is an urban area of 50.000 population. 4) Urban economies engage in competition with each other that result in many similarities between cities and individual firms or workers.000 or more inhabitants.000 but less than 50.000 or more population.

core central city residents make up about 38 percent of the metropolitan area population (about 85 out of 225 million). Table 1 shows the total and percentage of the population that lives within each of the urban rural classifications. Notice that the US became more urban than rural sometime around 1920. The US has become increasingly urbanized throughout its history as increases in agricultural productivity made it possible for fewer farmers to feed more urban dwellers. city will refer to the economic unit and municipality will refer to the governmental units. Larger cities often include many municipalities within a CBSA. developing countries are experiencing rapid urbanization. These areas occupy about 2 percent of the land area of the United States. Figure 1 shows how the rural and farm populations in the US changed during the 20th century. We will study why there are often many municipal governments within a CBSA and how this facilitates and complicates administration of urban areas. A municipality is a legally defined area based on the political jurisdiction of some local government. Although the US cannot become much more urbanized. The world as a whole just passed that threshold in 2008. The majority of urbanized area residents are suburbanites. About 80 percent of the population of the United States lives within the boundaries of urbanized area (222 out of 281 million). In this text. 5 .It is important to understand that this classification of CBSA’s is determined by integrated economic activity rather than by the area of a municipality. We will see that this is an essential characteristic of urbanizing societies. We will study the factors that lead to urbanization and its role in productivity growth.

421.440.460 32.360.000 Not in place INSIDE AND OUTSIDE METROPOLITAN AREA In metropolitan area In central city Not in central city Urban In urbanized area In urban cluster Rural Not in metropolitan area Urban In urbanized area In urban cluster Rural 281.885.009 105.000 to 2.543 55.500 or more Place of 1.824 109.647 7.986.552 114.789 25.499 Place of less than 1.347 2.336 46.599 4.821.220 9.679 85.715 22.280 79 68 39 29 11 8 3 21 2 2 1 16 225.539 192.036.061.192.068 59.161.906 100 222.367 4.618.323.844.981.887 19.695.227 22.763 82.744.695.580.401.152 3.127 140.880 80 30 50 41 38 3 9 20 8 1 7 12 6 .Table 1--US Population by Urban/Rural Designation United States URBAN AND RURAL Urban In urbanized area In central place Not in central place In urban cluster In central place Not in central place Rural Place of 2.256.089.628.705.989.708.061 30.

S.Figure 1—Rural and Farm Shares of Population 1900-2000 70 60 50 40 30 20 10 0 Farm share of population Rural share of population 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 New York City. is the largest urban area in the United States with 8 million people within its city limits. Notice the wide variation in growth rates. The next four largest urban areas in the U. Chicago. are those of Los Angeles. 7 . We will look at how cities can encourage or restrain urban growth and seek to understand the variation in urban growth rates. and its metropolitan area population exceeding 19 million. Miami and Philadelphia.

796. We will study the reasons for differently sized 8 .240 2. DC-VA-MD Houston-Baytown-Sugar Land.821 3. PA Tampa-St.5 16.687. MI Boston-Cambridge-Quincy.395.365. CA San Antonio.9 25.6 7. NY-NJ-PA Los Angeles-Long Beach-Santa Ana. Paul-Bloomington.819 1.2 4.644.806 2.2 4.2 21.876 3.183 4.715.038 1.9 16.7 11.9 12. Petersburg-Clearwater.087 2.2 8.391. ie.4 11. FL Washington-Arlington-Alexandria.5 15. AZ Seattle-Tacoma-Bellevue. CA Phoenix-Mesa-Scottsdale. FL 1/ 2/ 2000 Pop 18.557 4.254.3 25. MD Pittsburgh.344 4.452.407 4. PA-NJ-DE Dallas-Fort Worth-Arlington. Louis.703 1.711.161.098.1 21.564 4.878 2.147 5.7 45.796. TX Miami-Fort Lauderdale-Miami Beach. MA-NH Atlanta-Sandy Springs-Marietta.9 26.3 13.981 4.6 29.7 2. FL Denver-Aurora.833 2. CA Chicago-Naperville-Joliet.968. MO-KS Sacramento--Arden-Arcade--Roseville. TX Detroit-Warren-Livonia. and the power is close to one.8 9.632 1. (Pop*Rank)a=Const.Table 2—US City Rank by Population % Growth 8.836.179.5 12.735.143 2.698.3 18.323. OR-WA Kansas City.997 2.123.687 2. MN-WI San Diego-Carlsbad-San Marcos.007.881 1.813.561 Figure 2 illustrates the distribution of city sizes In the US.544 5. CO Cleveland-Elyria-Mentor.2 38.9 30.043.8 6. CA San Jose-Sunnyvale-Santa Clara.002 12. There is a regular empirical pattern to the distribution of city sizes within any arbitrary region that says the product population and rank raised to a power is roughly constant.148.927.247. CA Riverside-San Bernardino-Ontario. MO-IL Baltimore-Towson. IL-IN-WI Philadelphia-Camden-Wilmington.3 CMSA 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 New York-Northern New Jersey-Long Island. GA San Francisco-Oakland-Fremont.740 3.2 -1.994 2. TX Orlando.4 23. OH-KY-IN Portland-Vancouver-Beaverton.6 4.6 34.627 9. CA St. WA Minneapolis-St.251.431.552.009.316 5. OH Cincinnati-Middletown.857 1.

and New York.000 2.cities and the fact that large cities are relatively few.000.000. are the least dense.000 10. and many other geographic features such as patterns of land use.000.000 8. It also demonstrates the high variation in the area and population density of the cities.000. Note that the three US cities among the top 30 in the world.000 14.000 0 1 11 21 31 41 51 61 71 81 91 101 111 121 131 141 151 161 171 181 191 201 212 222 233 246 259 272 285 300 312 326 340 355 368 384 422 531 Table 3 illustrates the size distribution of the largest cities in the world.000.000 16.000 12. Los Angeles. and that Mumbai has nearly 17 times more people per square kilometer than Chicago. building sizes.000 6. transportation.000 18. and land rent. It shows the same general relationship between rank and population. We will develop economic theories that explain the geographic size of cities. while small cities are numerous.000 4.000.000. Chicago. 9 . The population density has important implications for each of these aspects of urban areas.000. Figure 2—Distribution of sizes of largest cities: population and rank 20.000.000.

770.380.720 11. Thailand 28 KINSHASA.812 2.000 17.533 2.590 2.270.000 9.295 1. Nigeria 26 LONDON.000 8. South Korea 4 MANILA. Argentina 17 Guangzhou.000 11.396 4.137 1.302 5. through the time of the Phoenicians and Mycenaeans.290.000.015 1.943 1.933 7.000 9.199 15.299 13.043 881 3.390 8.000 11.550.801 1. Egypt 11 Kolkata (Calcutta). Japan 10 CAIRO.000 14.000 Area sq km 7.000 18.590 1.000 9. from the founding of Jericho.250.000 14. China 19 Istanbul.000 19. Pakistan 23 Nagoya.430.710.000 19. Brazil 21 PARIS.190. and the growth of Venice.800.502 622 635 Density 4. China 16 BUENOS AIRES.835 2.160.598 Overview of course In the next chapter we will look at the historical development of cities.090.254 2.125 5.720 1. Country World Rank TOKYO.000 20.390.560 9.000 18. Brazil 7 MEXICO CITY. the rise and fall of Athens and Rome.000 16.530.881 4. We will also 10 .000 12.534 6.135 7. India 6 Sao Paulo.Table 3—World City Rank by Population City.730.000 8.952 971 1. China 14 MOSCOW. London.000 11.719 25.000 13.391 8.000 8.632 6. United States 25 Lagos.580 3.030.256 1.167 12.430. Paris.349 13. Mexico 8 Delhi.624 12.647 2.000 12.000 20.000 10.000 19.810. Turkey 20 Rio de Janeiro. Japan 1 JAKARTA.140. Philippines 5 Mumbai (Bombay).000.220.264 1. Indonesia 2 New York (NY). Dem Rep of Congo 29 TEHRAN.320. China 18 Shenzhen.260.460. Russia 15 BEIJING (PEKING).623 1.269 984 5.860.010.616 2.000 11. Iran 30 2008 est 34.063 3. India 9 Osaka.590 2.784 10.428 10.750.925 4. Japan 24 Chicago (IL).000 15. United States 3 SEOUL. France 22 Karachi. and Amsterdam.519 13. United States 13 Shanghai.035 2. India 12 Los Angeles (CA).425 777 2.400.010.000 8.042 8.425 2.126 5.784 4.000 8.000 21.517 9. United Kingdom 27 BANGKOK.

Some cities seek to promote growth and others seek to limit it. We will look at models of how clusters of firms within the same industry increase each other's productivity and attract more similar firms. and patterns of migration between cities. manufacturing firms. We will examine how and why urban governments seek to control land use patterns. and market areas affect the economic equilibrium. We will also look at the role of multiple municipal governments within an urbanized area in providing different levels of public amenities and tax rates. The urban landscape is largely determined by economic forces. apartment buildings. differences in wage levels. The next chapter will focus on agglomeration economies and the role they play in the development of cities with more sophisticated economies. and owner occupied housing are determined in equilibrium. We will develop an economic model of the classic mono-centric city and see how the location of professional offices. monopolistic competition. We will develop a set of location models that extend the ideas of perfect competition. Competition for land determines what economic activities occur at different locations throughout the city. Land use planning and zoning also play an important role in shaping the urban environment.develop an economic model of a simple trading town and a factory town. These agglomeration economies help to explain the size distribution of cities. We will see how location differentiates land and helps determine its value. We will look at the effectiveness of different means of promoting urban growth. They will also consider the effectiveness of policies to limit growth. 11 . We will also look at how firms in different industries can also contribute to each others' productivity. and monopoly to a more real world setting in which location. oligopoly. transportation costs. and why much of the common wisdom about how to promote growth is simply wrong.

Public school quality varies dramatically within and across urban areas. density. Housing markets are one of the most important aspects of urban economics. light rail. and race. and possible criminality. and heavy rail as a mode of travel for work commutes. Education affects individual opportunities but also determines the quality of the urban workforce. and air quality. Crime is a perennial urban problem. 12 . and the effects it has on education. and effects on neighborhoods. school financing. We will study the determinants of housing values and how they vary over the urban area. and structure. We will consider the efficient mix of expenditures on the different travel modes. fuel consumption. and the effects of this choice on congestion. They will develop models that explain how urban segregation occurs. educational attainment.Urban transportation systems have an enormous effect on the quality of urban life. bus. We will study the choice between automobile. education. We will examine the effect of law enforcement and incarceration expenditures on the quality of urban life. We will consider the efficient pricing of transportation modes. peer groups. We will study educational issues concerning school quality. and how this interacts with city size. We will consider the efficiency of various policy responses to urban criminality. employment. Housing markets tend to sort people into neighborhoods based on income.