Urban Economics SOSE 2009

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1 Urban Economics SOSE 2009

2 Urban Economics SOSE 2009 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

3 Urban Economics SOSE 2009 Office Hours: Prof. Dr. Volker Nitsch Wednesday 17:00 18:00; S3/ Please make an appointment Nicolai Wendland Wednesday 12:00 13:00 ; S3/ Please make an appointment

4 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.

5 What is Urban Economics? 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

6 What is Urban Economics? Urban Economics studies land use and land prices as a function of its location. It is also linked to Urban Planning, Urban Sociology, and Urban Politics. It provides a solid understanding of the economics of cities (and regions) and how market forces shape them.

7 What is Urban Economics? Questions we try to understand: Why is the mean rent in Zurich (18.62 /m 2 ) three times higher than it is in Berlin (5.75 /m 2 )? Why are housing prices in Ann Arbor (median house price $ 250,000) three times higher than in Detroit ($ 90,000)?

8 What is Urban Economics? Why is Toronto single peaked.

9 What is Urban Economics? and Barcelona flat?

10 What is Urban Economics? Why do skyscrapers cluster in Manhattan

11 What is Urban Economics? and why do middle-class families sprawl in the suburbs of Las Vegas but live in inner-city apartment buildings in Zurich?

12 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?

13 Course outline Basic Textbooks Arthur O Sullivan: Urban economics (6 th or 7 th 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

14 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

there were as many people living in cities (urban areas) as there were in rural

15 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 ,0 50,

16 Why study cities? Cities are big... Rank City Country Population Remark 1 Tōkyō Japan 33,800,000 incl. Yokohama, Kawasaki, Saitama incl. Bucheon, Goyang, Incheon, Seongnam, 2 Seoul Korea (South) 23,900,000 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: March 2009

17 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

18 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

19 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 % 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.

20 Why study cities? Cities define areas, countries, continents...

21 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.

22 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.

23 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

24 Axioms of Urban Economics Axiom 2: Self-Reinforcing Effects Generate Extreme Outcomes 1) Self-Reinforcing effects lead to changes in the same direction. 2) Example: retail trade or auto row attracts comparison shoppers. 3) Creative clusters attract other artists or creatives.

25 Axioms of Urban Economics 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.

26 Axioms of Urban Economics 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

27 Axioms of Urban Economics 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 City Size

Urban Economics City Size Utility and City Size Question: Why do cities differ in size and scope? While NYC has a population of more 18 million, the smallest urban area in the U.S. has only 13,000. A well