Urban Economics - Fachgebiet · “Urban Economics puts economics and geography together, exploring...

22.04.2009 | Fachgebiet Internationale Wirtschaft | Prof. Dr. Volker Nitsch | Nicolai Wendland

Urban Economics SOSE 2009

Urban Economics


The course will be part of VWL-B (together with the

course: Unternehmen in einer globalisierten Umwelt)

There will be a 90-minute final exam

SOSE 2009

Urban Economics


Office Hours:

Prof. Dr. Volker Nitsch [email protected]

Wednesday 17:00 – 18:00; S3/13 138 Please make an appointment

Nicolai Wendland [email protected]

Wednesday 12:00 – 13:00 ; S3/13 136 Please make an appointment

SOSE 2009

What is Urban Economics?


“Urban Economics puts economics and geography together,

exploring the geographical or location choices of utility maximizing

households and profit maximizing firms. Urban economics also

identifies inefficiencies in location choices and examines alternative

public policies to promote efficient choices.“

O‘ Sullivan (2009), p.1.



•  Urban (and Regional) Economics adds geographical space to economic

analysis .

•  It recognizes that goods are produced and traded at certain locations.

They are bought by individuals, who live at one and work at another

location. Distance between economic activities implies costs for moving

people and goods. It also affects communication and interaction among

economic agents.

•  A main focus is land. Land is immobile and associated with a unique

location



•  Urban Economics studies land use and land prices

as a function of its location.

It provides a solid understanding of the economics of cities (and regions) and how market forces shape them.

•  It is also linked to Urban Planning, Urban Sociology, and Urban

Politics.



Questions we try to understand:

•  Why is the mean rent in Zurich (18.62 €/m2) three times higher than

it is in Berlin (5.75 €/m2) ?

•  Why are housing prices in Ann Arbor (median house price $ 250,000)

three times higher than in Detroit ($ 90,000)?



Why is Toronto “single peaked”….



… and Barcelona “flat”?



Why do skyscrapers cluster in Manhattan…



… and why do middle-class families sprawl in the suburbs of Las Vegas

but live in inner-city apartment buildings in Zurich?

What can you expect from this course?


A. Location Economics: Why do people live where they do? Why do businesses locate where they do?

B. Land and Real Estate Values: Why are some land values astronomical? How do land markets work? What is their role in making the urban economy function?

C. Cities: Why and where do they emerge? How are they distributed across space? How important is history?

D. Transportation: One of the driving forces of an economy. What are the real costs of commuting to work and who pays them? How does congestion cause economic inefficiencies?

Course outline


Basic Textbooks

•  Arthur O´Sullivan: Urban economics (6th or 7th ed.)

•  John F. Mc Donald and Daniel P. McMillen: Urban Economics and

Real Estate

•  Richard J Arnott and Daniel P.McMillen (eds.): A Companion to

Urban Economics

Course outline


PART I Why do cities exist? Why do firms cluster? City Size Urban Growth

PART II The Basic Urban Model and Extensions The Monocentric City Land Rent and Urban Land Use Patterns The Demise of the Monocentric City /Multicentric and Edge Cities

PART III Public Transport and Traffic Congestion Land Use Control and Zoning

Why study cities?


Cities are important...

By the end of the year 2007, for the first time in the history of mankind, there were as many people living in cities (urban areas) as there were in rural areas.

Projections predict an urbanization rate of 57.2% by the year 2025 and of about 70% by 2050.

2007

—

50,0

100,0

2007

2025

2050

Why study cities?


Cities are big... Rank City Country Population Remark

1 Tōkyō Japan 33,800,000 incl. Yokohama, Kawasaki, Saitama

2 Seoul Korea (South) 23,900,000 incl. Bucheon, Goyang, Incheon, Seongnam, Suweon

3 Ciudad de México Mexico 22,900,000 incl. Nezahualcóyotl, Ecatepec, Naucalpan

4 Delhi India 22,400,000 incl. Faridabad, Ghaziabad

5 Mumbai India 22,300,000 incl. Bhiwandi, Kalyan, Thane, Ulhasnagar

6 New York United States of America 21,900,000 incl. Newark, Paterson

7 São Paulo Brazil 21,000,000 incl. Guarulhos

8 Manila Philippines 19,200,000 incl. Kalookan, Quezon City

9 Los Angeles United States of America 18,000,000 incl. Riverside, Anaheim

10 Shanghai China 17,900,000

source: http://www.citypopulation.de, March 2009

Why study cities?


Cities are the centers of economic activity...

Example: The 3 core areas in Japan (Tokyo, Osaka, Nagoya) cover

• 5.2% of the total area of Japan but

•  33% of its population •  40% of its GDP •  31% of its manufacturing employment

Why study cities?


Cities create proximity ...

Ciccone and Hall (AER, 1996) and Ciccone (EER, 2002) explore the relation between employment density and productivity: They find an elasticity of about 5% (US), and 4.5% (Europe) respectively.

Doubling the density increases productivity by 5% (4.5%).

Rosenthal and Strange (REStat, 2003) show that for certain industries, distance is of major importance.

•  Biggest effects within 1 mile •  Importance declines with distance •  Employment of different industries is less important

Why study cities?


Cities are centers of creativity and innovation...

They create environments and amenities, which attract workers with distinctive preferences (see Florida, R. (2002): The Rise of the Creative Class).

Most innovative activity takes place within cities and metropolitan regions. Feldmann and Audretsch (EER, 1999) collected a dataset of 3969 US innovations (patents) in 1982.

96% of the innovations originated in metropolitan areas.

Probably the most famous place of innovation is the Silicon Valley area, where a considerable cluster of software development firms emerged.

Why study cities?


Cities define areas, countries, continents...

Why study cities?


Political and functional boundaries define urban areas…

The political city is defined by administrative boundaries.

The functional city (or area) is defined by a relatively high population and employment density and contains a variety of closely related activities.

We (Urban Economists) are mainly interested in the functional city.

Why study cities?


Boundaries may be arbitrary…

Area Metro Pop City Pop Ratio Berlin 4.17 Mio 3.39 Mio 81% Boston 4.39 Mio 0.59 Mio 13% Barcelona 4.40 Mio 1.58 Mio 36% Bern 0.35 Mio 0.13 mio 37%

There are differences between political and functional boundaries.

Axioms of Urban Economics


An Axiom is a self-evident truth...

Axiom 1: Prices Adjust to Achieve Locational Equilibrium

1) A Locational Equilibrium creates a situation in which no agent has an incentive to move.

2) In equilibrium, location advantages are capitalized in land values /rents (or wages).

rent beachhouse > rent highwayhouse

rent in center > rent on city fringe



Axiom 2: Self-Reinforcing Effects Generate Extreme Outcomes

2) Example: retail trade or auto row attracts comparison shoppers.

3) Creative clusters attract other artists or creatives.

1) Self-Reinforcing effects lead to changes in the same direction.



Axiom 3: Externalities Cause Inefficiency

An externality is a cost or benefit of a transaction by someone other than the buyer or seller.

External cost: Pollution due to heavy industry.

External benefit: Renovating a house may increase the value of adjacent property.



Axiom 4: Production is Subject to Economies of Scale

Economies of scale occur when the average cost of production decreases as the output increases.

They occur for two reasons:

1) Indivisible Goods: Machines or other inputs required to produce one single unit or a thousand.

2) Factor Specialization: •  Specialized worker is master of one task •  Continuity •  Repeating and learning



Axiom 5: Competition Generates Zero Profit

1) Competitors enter the market until economic profits equal zero.

2) Economic costs include all opportunity costs of time and funds.

3) Zero profit: Firms are making just enough money to stay in business but not enough to attract more entrants.

Urban Economics - Fachgebiet · “Urban Economics puts economics and geography together, exploring...

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