Urban Land Use

Land Use Goes to the Highest Bidder

• We have thought about manufacturing firms, office firms, households and farmers.
Note that all firms have to make the same profits (probably 0) in all cases, whereas
households have to have the same utility

• Whether it is an open or closed city model determines where this utility level comes
from

• In an open city model, this utility level is taken as given, and is available in a
“reservation location” -> population N is endogenous and utility u is exogenous

• In a closed city model, this utility level is determined by everyone having a place to
live -> population N is exogenous and utility u is endogenous
 The Open City Case

Rent

Manufacturing
Firms’
Bid-Rent

Household
Bid-Rent for
the given
utility level u
Farmers’
Bid-Rent

Service
Firms’
Bid-Rent

Xf=urban fringe x
(blame Microsoft that this
dashed line is not perfectly
vertical)
 The Closed City Case
• Given any chosen utility level u’, we can figure out how many people are
housed from the previous graph

• We can do this by looking at the demand for space at each location

and adding up over residential locations

• If the city runs out (we get to xf) before everyone is housed then we know
that this cannot be an equilibrium and residential bid-rent must be higher

• Residential bid-rent must be higher because that causes each hh to

consume less space
• People have a lower utility level as a result

• If the people run out before we get to the edge of the city then we know
this cannot be an equilibrium and residential bid-rent must fall

• Each hh consumes more space

• People have higher utility
 Building Heights and Density Fall with CBD Distance

• We saw that businesses will use more capital and less land in locations where rents
are high

• In an extension of the model, we can think about households caring about housing
services instead of just space.

• Housing services H are produced with land s and other inputs K

• As we x increases, there is less competition to live in these locations and land gets
cheaper, causing developers to substitute away from K and toward s

• Because for other applications of the model, the implications are the same whether
or not we consider housing, we will not worry about housing services again until we
analyze residential housing demand