🏢Urban Fiscal Policy Unit 1 – Urban Economic Theories

Key Urban Economic Concepts

• Urban economics studies the spatial structure, economic processes, and policy issues related to cities and metropolitan areas
• Agglomeration economies are the benefits that firms and individuals derive from being located near each other in cities (knowledge spillovers, labor market pooling, input sharing)
• Central place theory explains the size, number, and location of cities and towns in a region based on the range and threshold of goods and services
  • Range is the maximum distance consumers are willing to travel to purchase a good or service
  • Threshold is the minimum market size required for a business to be profitable
• Bid-rent theory describes how land use and land values change with distance from the city center due to competition among different users (residential, commercial, industrial)
• Monocentric city model assumes a single central business district (CBD) where all employment is concentrated, surrounded by residential areas
• Polycentric city model recognizes multiple employment centers within a metropolitan area, each with its own land use pattern and commuting flows
• Externalities are the unintended consequences of economic activities that affect third parties, either positively (public parks) or negatively (air pollution)

Historical Development of Urban Economics

• Early contributions to urban economics can be traced back to Johann Heinrich von Thünen's model of agricultural land use (1826) and Alfred Marshall's concept of industrial districts (1890)
• Central place theory was developed by Walter Christaller (1933) and August Lösch (1940) to explain the hierarchical distribution of cities and towns
• The monocentric city model was introduced by William Alonso (1964), based on the bid-rent theory of land use by Johann Heinrich von Thünen
• The Alonso-Muth-Mills model (1960s-1970s) extended the monocentric city model by incorporating housing production and transportation costs
• The new urban economics emerged in the 1970s and 1980s, emphasizing the role of agglomeration economies, human capital, and knowledge spillovers in urban growth
  • Key contributors include Paul Krugman, Masahisa Fujita, and Anthony Venables
• The polycentric city model gained prominence in the 1990s and 2000s, reflecting the decentralization of employment and the rise of edge cities (Joel Garreau, 1991)
• Recent developments in urban economics focus on issues such as gentrification, inequality, sustainability, and the impact of technology on cities

Major Theories in Urban Economics

• Central place theory explains the size, number, and location of cities and towns based on the range and threshold of goods and services
  • Christaller's model assumes a hexagonal market area for each central place, with higher-order centers offering a wider range of goods and services
  • Lösch's model allows for overlapping market areas and a more complex hierarchy of central places
• Bid-rent theory describes how land use and land values change with distance from the city center due to competition among different users
  • The slope of the bid-rent curve depends on the transportation costs and the value added by each land use
  • The intersection of bid-rent curves determines the boundaries between different land use zones
• The monocentric city model assumes a single CBD where all employment is concentrated, surrounded by residential areas
  • Households choose their location based on a trade-off between housing costs and commuting costs
  • The model predicts a declining density gradient and increasing housing prices towards the city center
• The Alonso-Muth-Mills model extends the monocentric city model by incorporating housing production and transportation costs
  • Housing is produced using land and capital, with a substitution effect between the two inputs
  • Transportation costs include both monetary costs (fuel, fares) and time costs (opportunity cost of commuting time)
• Agglomeration economies explain the benefits of spatial concentration for firms and individuals in cities
  • Localization economies arise from the clustering of firms within the same industry (specialized labor pool, knowledge spillovers)
  • Urbanization economies result from the overall size and diversity of a city (infrastructure, market access, innovation)
• The polycentric city model recognizes multiple employment centers within a metropolitan area, each with its own land use pattern and commuting flows
  • Polycentricity can result from the decentralization of employment, the growth of suburban business districts, or the merger of previously separate cities
  • The model predicts a more complex pattern of land use and commuting, with multiple peaks and valleys in the density and price gradients

Urban Spatial Structure and Land Use

• Urban spatial structure refers to the arrangement of land uses, transportation networks, and population density within a city or metropolitan area
• The concentric zone model (Ernest Burgess, 1925) describes a city as a series of concentric rings with different land uses (CBD, factory zone, working-class residential, middle-class residential, commuter zone)
• The sector model (Homer Hoyt, 1939) suggests that land use patterns follow transportation corridors, with wedge-shaped sectors radiating from the city center
• The multiple nuclei model (Chauncy Harris and Edward Ullman, 1945) recognizes that cities can have multiple centers of activity, each with its own land use pattern
• Land use zoning is a common policy tool used to regulate the type, intensity, and location of different land uses within a city (residential, commercial, industrial, open space)
  • Zoning can be used to separate incompatible land uses, preserve property values, and guide urban development
  • Critics argue that zoning can lead to segregation, sprawl, and higher housing costs by restricting the supply of land for certain uses
• Urban renewal refers to the redevelopment of older, deteriorated areas of a city, often involving the clearance of existing buildings and the construction of new housing, offices, or public spaces
  • Urban renewal projects can revitalize declining neighborhoods and attract new investment, but they can also displace existing residents and businesses
• Gentrification is the process by which higher-income households move into lower-income neighborhoods, often resulting in rising property values, rents, and displacement of original residents
  • Gentrification can bring new amenities and services to a neighborhood, but it can also exacerbate income inequality and social tensions

Labor Markets and Migration in Cities

• Cities are characterized by thick labor markets, with a large pool of workers and a diverse range of job opportunities
• Agglomeration economies in cities can lead to higher productivity, wages, and employment growth compared to rural areas
  • Localization economies benefit firms and workers within the same industry through knowledge spillovers, specialized labor, and input sharing
  • Urbanization economies benefit all firms and workers in a city through access to infrastructure, markets, and diverse skills
• Human capital theory suggests that cities attract highly educated and skilled workers, who in turn drive innovation, entrepreneurship, and economic growth
  • Cities with a higher share of college-educated workers tend to have higher wages, productivity, and quality of life
  • The concentration of human capital in cities can also lead to greater income inequality between skilled and unskilled workers
• Migration plays a key role in shaping the population and labor force of cities
  • Rural-to-urban migration has been a major driver of urbanization, as people move to cities in search of better job opportunities and living conditions
  • International migration has also contributed to the growth and diversity of many cities, particularly in developed countries
• The informal sector is a significant part of the urban labor market in many developing countries
  • Informal workers are self-employed or work in small, unregistered businesses, often in low-skill, low-wage jobs (street vending, domestic service)
  • The informal sector provides employment and income for many urban poor, but it also lacks legal protections and social benefits
• Labor market policies in cities aim to promote job creation, skills development, and worker protection
  • Minimum wage laws, job training programs, and anti-discrimination regulations are examples of policies that can affect urban labor markets
  • Critics argue that some labor market regulations can reduce employment and business growth by increasing costs and reducing flexibility

Urban Growth and Decline

• Urban growth refers to the increase in the population, economic activity, and physical size of a city or metropolitan area over time
• Urbanization is the process by which an increasing share of a country's population lives in cities, driven by rural-to-urban migration and natural population growth
  • The global urbanization rate has increased from 30% in 1950 to 55% in 2018, and is projected to reach 68% by 2050 (UN World Urbanization Prospects)
  • Urbanization is most rapid in developing countries, particularly in Asia and Africa
• Urban agglomeration economies are a key driver of urban growth, as firms and workers benefit from the concentration of economic activity in cities
  • Localization economies and urbanization economies can create self-reinforcing cycles of growth, as more firms and workers are attracted to successful cities
  • However, agglomeration economies can also lead to congestion, pollution, and other negative externalities that may limit urban growth
• Urban decline refers to the loss of population, jobs, and economic activity in a city or metropolitan area over time
  • Deindustrialization, suburbanization, and demographic shifts are common causes of urban decline, particularly in older industrial cities
  • Urban decline can lead to a range of social and economic problems, such as poverty, crime, and infrastructure decay
• Shrinking cities are those that experience significant and sustained population loss, often due to a combination of economic, demographic, and political factors
  • Examples of shrinking cities include Detroit, USA; Leipzig, Germany; and Youngstown, USA
  • Strategies for managing urban shrinkage include rightsizing infrastructure, repurposing vacant land, and attracting new industries and residents
• Urban resilience refers to the ability of a city to adapt and recover from shocks and stresses, such as natural disasters, economic crises, and social unrest
  • Building urban resilience involves investing in infrastructure, social capital, and institutional capacity to prepare for and respond to challenges
  • Examples of resilient cities include Tokyo, Japan (earthquake-resistant buildings) and Rotterdam, Netherlands (flood protection and water management)

Policy Implications and Applications

• Urban policies aim to address the challenges and opportunities of cities, such as economic development, housing, transportation, and environmental sustainability
• Land use policies, such as zoning and urban growth boundaries, can shape the spatial structure and development patterns of cities
  • Zoning can be used to separate incompatible land uses, preserve open space, and guide development to certain areas
  • Urban growth boundaries can limit sprawl and encourage compact, transit-oriented development, but may also increase housing costs
• Housing policies aim to ensure access to affordable, quality housing for all residents
  • Public housing, rent control, and housing vouchers are examples of policies that provide direct assistance to low-income households
  • Inclusionary zoning and density bonuses can incentivize developers to include affordable units in new projects
• Transportation policies shape the mobility options and accessibility of cities
  • Investment in public transit, bike lanes, and pedestrian infrastructure can reduce car dependence and improve access for non-drivers
  • Congestion pricing and parking management can reduce traffic and encourage alternative modes of transportation
• Economic development policies aim to attract and retain businesses, jobs, and investment in cities
  • Tax incentives, workforce training, and business incubators are examples of policies that support local economic development
  • Cluster strategies aim to build on a city's existing strengths and promote innovation and entrepreneurship in specific industries
• Environmental policies address the sustainability and resilience of cities
  • Green building standards, renewable energy targets, and waste reduction programs can reduce the environmental impact of cities
  • Climate adaptation strategies, such as green infrastructure and flood protection, can help cities prepare for the impacts of climate change
• Social policies aim to promote equity, inclusion, and quality of life in cities
  • Community development, public health, and education programs can address the needs of disadvantaged populations
  • Participatory planning and budgeting can engage residents in decision-making and build social capital

Current Debates and Future Directions

• The role of cities in the global economy is a key debate in urban economics
  • Some argue that cities are the engines of innovation, productivity, and growth in the 21st century
  • Others caution that the benefits of urbanization are unevenly distributed, and that many cities face challenges of inequality, informality, and sustainability
• The impact of technology on cities is another important debate
  • Smart city technologies, such as sensors, data analytics, and automation, have the potential to improve urban services and quality of life
  • However, there are also concerns about privacy, security, and the digital divide, as well as the risk of techno-solutionism that ignores underlying social and political issues
• The future of work in cities is a growing concern, as automation and digitalization disrupt traditional employment patterns
  • Some predict that cities will continue to be centers of innovation and job creation, particularly in knowledge-intensive industries
  • Others worry that automation will lead to job losses and increasing inequality, particularly for low-skill and routine jobs
• The COVID-19 pandemic has raised new questions about the resilience and adaptability of cities
  • The pandemic has highlighted the importance of public health, social safety nets, and essential workers in cities
  • It has also accelerated trends such as remote work, e-commerce, and digital service delivery, which may have long-term impacts on urban form and function
• Climate change poses a major challenge for cities, as they are both contributors to and victims of global warming
  • Cities account for the majority of greenhouse gas emissions, and are also vulnerable to rising sea levels, extreme weather events, and other impacts of climate change
  • Strategies for urban climate mitigation and adaptation include renewable energy, green infrastructure, and resilient design
• Inequality and segregation are persistent problems in many cities, reflecting broader social and economic disparities
  • Income and wealth inequality, as well as racial and ethnic segregation, can lead to unequal access to opportunities, services, and amenities in cities
  • Policies to address urban inequality include affordable housing, equitable transportation, and community development programs
• The future of urban governance is a key question, as cities face complex challenges that require coordination and collaboration across multiple actors and scales
  • Some argue for greater devolution of power and resources to cities, to enable them to tackle local problems and pursue innovative solutions
  • Others emphasize the need for regional and national frameworks to address issues that cross jurisdictional boundaries, such as transportation, environmental protection, and economic development