ECN741: Urban Economics Neighborhood Amenities. Amenities Class Outline  What Are Amenities? ...

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Transcript of ECN741: Urban Economics Neighborhood Amenities. Amenities Class Outline  What Are Amenities? ...

PPA786: Urban Policy

ECN741: Urban EconomicsNeighborhood Amenities

Amenities Class Outline

What Are Amenities?

Amenities in an Urban Model

Looking Ahead: Amenities and House Values

Sorting with Amenities

Endogenous Amenities

Amenities Amenities

Amenities (or neighborhood amenities) are an important topic in urban economics.

They get us away from the assumption that the only locational characteristic people care about is access to jobs.

They allow us to consider a long list of factors that people care about, many of which have links to public policy.

Amenities Amenity Examples

Amenities studied in the literature include:

Public school qualityThe property tax rateThe crime rateAir qualityWater qualityDistance from toxic waste sitesAccess to parksAccess to lakes or rivers

Amenities Amenities in Urban Economics

Amenities were hinted at in Alonso; he included distance from the center in the utility function.

This approach also appeared in Muth.

More formal modeling began with Polinsky and Shavell (JPubE, 1976) and, for endogenous amenities, Yinger (JUE, 1976).

Amenities Polinsky/Shavell

Polinsky and Shavell assume amenities are a function of income and include them in the utility function:

Then they restate the problem in terms of an indirect utility function:

Amenities Polinsky/Shavell, 2

By differentiating the indirect utility function with respect to u and recognizing that every household must achieve the same utility, they show that:

This leads to:

Amenities Polinsky/Shavell, 3

This result implies that an improvement the amenity boosts bids; in other words, households must pay for the privilege of living in a nice neighborhood!

A key issue for an urban model is whether the sign of A{u} is positive or negative: How do amenities change as one moves away from the CBD?.

A positive sign flattens the bid functionA negative sign makes the bid function steeper

Amenities Bid Functions with Amenities

P{u}uPrice function without amenitiesPrice function with A{u}>0Price function with A{u}>>0Price function with A{u}