cities in competition.pdf

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Urban Studies, Vol. 36, Nos 56, 865891, 1999

Cities in Competition: Equity Issues

Chris Jensen-Butler

[Paper received in nal form, December 1998]

1. Introduction

There is a grow ing consensus that in theemerging globalised and knowledge-basedeconomy, competition is increasing between localities across national borders. For a var-iety of reasons, the city is becoming the pr incipal type of locality from which thisspatial competition is driven (Cheshire andCarbonaro, 1996; Jensen-Butler et al. , 1996). The main reason for the new ro le of cities is perhaps the grow ing importan ce of creativityand innovative capacity in determining econ-omic performance. Creativity and innovativecapacity are typically both highly localisedand immobile, and cities are the prime local-ities where these develop. At the same time, there is a grow ing theoretical interest in re-gional and urban economics as well as in economic geography in the analysis of the

spatial dimensions of imperfect competition and increasing returns, pointing to the growthadvantages of concentration of economic activity (K rugm an, 1991, 1995). These devel-opments have been paralleled by a shift in the policy or ientation of many cities towardsa more entrepreneurial rather than a redis- tributive or managerial role (H arvey, 1989;Lever, 1992; Parkinson, 1991).

As a consequence of these developments, the question of the nature of the determ inantsof city success in the new competitive en-vironment is frequently posed. Examination of policy statements from a wide range of

European and North American cities sug-gests three key dimensions: efciency; aminimum level of social equality; and a clean and attractive environment (see, for example,Lord Mayors Ofce, 1991; Regional Plan Association, 1990). There are also theoreticalarguments for the identication of these threedimensions as being central to urban success(Jensen-Butler, 1996a). This raises an oldquestion in a new context: what is the relationship between efciency and equity in thecontext of the city and which consequencesdoes this relationship have for urban econ-omic success? This is the issue addressed in the present paper where the pr ime interest is the relationships betw een urban econom ic performance and equity within the city. Is-sues of territorial justice between different

cities in a city system are not considered. First, denitions of equity and efciency areexamined together with different views of the re lationship between efciency and eq-uity in a general theoretical framework. In section 3, analysis of this relationship is un-dertaken in the urban context, where rst the hous ing and labour markets in ci ties are con-sidered, followed by examination of the rela-

tionship in the contex t of the newknowledge-based information economy. In sections 46, the relationship between urban policy and equity issues is exam ined. In section 4, the equity consequences of policie s

Chris Jensen-Butler is in the Department of Economics, University of St Andrews, St Andrews, Fife, KY16 9HL, UK. Fax: (1334)462444. E-mail: [email protected]. The author wishes to thank Carlos Esteves of the Department of Environment and Planning,University of Aveiro, Portugal, for technical assistance.

0042-0980/99/05/0865-27 1999 The Editors of Urban Studies


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CHRIS JENSEN-BUTLER866

designed to address market breakdown arediscussed; in section 5, the efciency andequity issues involved with urban service provision are exam ined; and in section 6, theconsequences of the new type of entre- preneu rial urban policy for equity are dis-cussed. Section 7 presents an empiricalillustration of the conceptual complexity anddifculties of measurement of equality in an urban context.

2. Equity and Efciency: Denitions andBasic Theory

Efciency can be dened as the maximisa-

tion of grow th in an econom y, which in turn implies the optim al allocation of resourcesover time. Equity relates to the distribution of consumption or income (or u tility)amongst members of society. In its broadest interpretation it relates to well-being, as an expression of satisfaction. The interrelation-ships between efciency and equity are importan t both for the performance of the urban

economy and for urban policy.Efciency, following general equilibrium

theory, involves the optim al alloca tion of inputs to production and outputs to con-sumers as well as an optim al product m ix for the econom y as a whole. Pareto optim alitymeans that no reallocation of inputs can bemade to produce more of one product with-out producing less of another. No reallocation of outputs between consum ers can bemade without making at least one consumer worse off and no other output combination can be selected without reducing aggregateutility. Edgeworth boxes are traditionallyused to illustrate the derivation of contract curves representing efcient solutions. Fig-ure 1 shows a utility possibilities frontier

between two individu als, which represents the contract curve in term s of their utili tie s.Any point on the curve is efcient, but pointsA and C are highly inequitable whilst point B is equitable.

The market will, under certain conditions,ensure Pareto optim ality. These conditionsare absence of monopoly or oligopoly; ab-sence of externalities, positive or negative;

and absence of public goods (goods whichare non-rival and non-excludable). As will be

Figure 1. A utility possibilities frontier between two individuals: the curve u u corresponds to the contract curve.


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EQUITY ISSUES 867

argued later, especially in urban areas theseconditions are not met.

In addition, the ability of the market toattain Pareto optimality assumes, under per-fect competition, that a number of conditionsregarding the nature of the transactions can be met. These include: the possibil i ty of marginal adjustments in production and con-sumption; perfect knowledge and infor-mation about the values of a ll outcomes(implicitly implying a short- to medium-term time-hori zon for produc tion and consum p- tion); homogeneity of each produc t; lack of market rigidities. In the urban case, many of these conditions do not exist as land is in

xed supply, many urban investments arelarge and indivisible, time-horizons associ-ated w ith urban investments are frequentlylong and projects are often associated withconsiderable risk.

The failure to meet these conditi ons con-stitutes market breakdown and it is a principal reason for the existence of strong public policy regimes in cities, where market break-

down is common (Jensen-Butler, 1996a).A second important reason for public in-

tervention is to reduce social and econom icinequalitythe equity goal, based on the polit ical aim of changing the distribu tion of income (utility) in society. Market solutionsand Pareto optimality take no account of thedistribution of utility amongst individuals in a society. All points on the utility possibility

frontier in Figure 1 are equally acceptable in efciency terms, but they may not be so in term s of equity . Urban policy has traditi on-ally had a rm base in equity goals.

The concept of equity is, as Richardson (1977, p. 161) and many other economists have noted, very unclear, not least because it moves economics into the uncharted realmsof philosophy and ethics. More specically, the concept of equity is slippery for threemain reasons. First, there are different approaches to its denition. Second ly, there isconsiderable divergence of views concerning the relationship between equity andefciency. Thirdly, further problems are in- troduc ed when the concep t of spatial, as op- posed to interpersonal, equity is introduced.

All three problems, it appears, impingesignicantly upon the urban case.

2.1 Dening Equity

Equity is a difcult concept to operationaliseas well-being is clearly a multidimensional phenom enon, including many elem entswhich are difcult to quantify. There haslong been awareness that, ideally, an inte-grated approach, incorporating many dimen-sions of social well-being into a compositemeasure is to be preferred (Coates et al. ,1977). There are, however, serious theoreti-cal and operational problems facing the con-struction of such a multidimensional index.Proposals for an approach to the study of social well-being and equity often rely on aselection of indicators (Knox, 1975), but hereagain, theoretical, aggregation and weighting problem s are substantia l.

Operationally, a common index of equityis a measure of dispersion of income per capita in an economy, a measure that can refer either to individuals or spatial units. The Gini coefcient, derived from theLorenz curve, is commonly used. Changes in this type of index represent a ra ther strongview of equity. Four broad denitions of equity can be identied in relation to thesocial welfare function:

W 5 W (U 1, U 2, U n)

which represents a way of aggregating theutility levels ( U ) of the n members of society.

The egalitarian view of equity requires that all mem bers of society receiveequa l amounts of goods or income. In term s of changes, this requir es that anyeconomic transaction involves the conditionsdW /dU i . 0 and ds u/dU i , 0; where s is ameasure of dispersion of U . This view of equity is commonly used in spatial and urban studies of social justice.

The Rawlsian v iew of equity (Rawls ,1971) argues that everyone should enjoy thesame basic libertarian rights, and that while the distr ibution of wealth and income need not be equal, it must be to everyones advan-


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tage (p . 61). For Rawls, social justice is not increased by any transaction unless the utilityof the person with the lowest level of utilityis increased: dW /dU i . 0 and dW /dU mi n . 0.Equality is not in outcomes, but in rights andopportunities. Rawls approach opens the possibi lity that as long as a declining share of a growing cake represents an increase in utility for the person with the smallest share, then social justice is im proved . It is possibl e to interpret in the Rawlsian framework thecurrent view that social justice in a city can be improved by the engagement of city au- thoriti es in local urban econom ic develop-ment. Here the income of the poorest can be

improved through employment or increased produc tivity whilst in re lation to str ict egalitarian pr inciples, equity may decline. Mier (1993) provides an example of the appli-cation of Rawlsian ideas to economic devel-opment in Chicago.

The utilitarian approach to equity, orig-inating with Bentham and developed by Mill,weights every persons utility equally and

seeks to maximise the total utility of society. Thus:

W 5 U 1 1 U 2 1 . 1 U nHere, a signicant principle is that there is no posit ive weighting of the utility of the poores t. Also, this view of utility and welfareopens for the possibility that winners can compensate losers as long as W increases. The utili tarian view has an interesting conse-

quence for equity when coupled with the ideaof diminishing marginal utility, in this caseof money. Income transfers from rich to poor will increase utility of the poor by more than the utility of the rich is decreased, a result noted by Pigou (1920) . Therefo re societys tota l utili ty will increase. However , utilitari-anism rests heavily on the problematic con-cept of cardinal utility.

Finally , the concept of equity in the puremarket approach equates equity with a situ-ation where each unit of labour (and capital)is remunerated according to the value of itsmarginal product. In the case of labour:

dQ dL

p 5 w

where

dQ dL

is the marginal product of labour; p the

unit price of output; and w the wage rate.

The welfare function here is the sum of consumer and producer surplus plus external-ities. This type of social welfare function isgenerally not associated with equity. At best,market solutions are equity neutral. A morecommonly held view is that pure market solutions will create inequality. The recent work of Krugman and Venables (1995) sug-gests that in the face of declining transport costs and increasing returns to scale, polaris-

ation of economic activity and income willbe the principal spatial consequence of econ-omic growth, contrary to the predictions of neo-classical region al grow th theory . Boyneand Powell (1993) identify an increase in terr itor ia l injustice, measured by the strengthof the negative relationship between social needs and housing provision in space, in Britain in the 1980s. This, it is argued, arose

from increasing market orientation in the period.

2.2 Separability of Efciency and Equity

The standard approach to the social welfarefunction assumes that efciency and equityare separable; they do not interact (Solow,1970). This arises from the Second Welfare

Theorem , which basically states that given any initial resource endowment, there is a point on the contract curve that corresponds to a Pareto optim um . It follows that redistr i-bution for equity goals can occur without affecting efciency, not through manipu-lation of prices, but only through reallocation of endowments, in the form of scal mea-sures and income transfers. There are, how-ever, three basic views on the separabilityissue.

The rst is that there is no interact ion. Thismeans that equity goals can be pursued cost-lessly as long as this occurs through reallocation of income and not through manipulation of relative prices.

The second ar ises from grow ing cr iticism


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EQUITY ISSUES 869

Figure 2. The traditional view of the trade-off between efciency (national growth, Y n) and equity ( )represented by the curve t t : P P is the decision-makers preference function and Y n* and * the outcom e.

of the notion of separability. For example,Atkinson and S tiglitz (1980) argue that redis-

tribution of endowments affects incentivesand productive outcomes. Also, it is clear from the two welfare theorems that any inter-ference with prices will affect efciency negativ ely. This leads, as show n in Figure 2, to the idea of a trade-of f between efciency(Y n) , representing growth in the nationaleconomy and equity ( ). The trade-off curveis tt and the decision-makers preference

function is represented by PP . Equity can here be treated as either spatia l or non-spatial. The principal consequence of this posit ion is that any argument for str iving to increase social equality must be non-economicfor example, political, m oral or ethical.

The third position is that there is a positiverelationship between increasing equality andefciency, even though income redistribution and manipulation of market prices are themeans by which greater social equality isachieved. Risk-aversion amongst actors af-fects expected utility values, which can beone reason for this positive relationship. Re-cent research has suggested that equity andeconomic and political stability are closely

related and that s tabili ty induces faster growth (Persson and Tabelini, 1994; Alesina

and Perroti, 1993). There is a substantial literature on the

effects of both inequality and the welfarestate on economic growth (see, for example,Okun, 1975). In the view of a number of authors, including Atkinson (1995a, 1995b), the main conclusion em erging from compar-ative cross-country empirical studies is that the hypothesis that greater equality means

less efciency is not proven. Atkinson (1995b) examines theoretically the supposedunderlying mechanisms by which welfarestate expenditure reduces efciency. He takes a Cobb Douglas produc tion function:

Y 5 K 1 2 b(AL )b (1)

where, Y is output; K is capital; L is labour;and A is productivity.

Taking logs, differentiating, and assuminga constant labour force, gives the growth rateform (where g i is the proportional growthrate of variable i ):

g Y 5 (1 2 b ) g K 1 b g A (2)

The standard argum ent is that welfare state provision reduces work effort and therefore


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reduces A in equation (1). However, thiswould be a one-off effect. The more seriousconcerns relate to equation (2), where it issometimes argued that welfare state transfersaffect g K and g A through savings and capitalformation, investment and rm growth, and throug h human capita l form ation. These negativ e effects would not be one-of f. Atkin-son rejects these arguments on theoreticalgrounds, noting that if transfer payments areused for education, growth rates can actuallyrise.

One possible resolution of these compet-ing positions can be found in Figure 3 which presents an extended view of the trade-off,

suggesting that the negative relationship il-lustrated in Figure 2 constitutes only thecentral part of a much larger curve (Castroand Jensen-Butler, 1997). At very high levelsof equity, the curve approaches zero growthasymptotically, as here the incentive to workis based upon altruism alone. At very lowlevels of equity, a positive relationship between efciency and equity appears and, as

argued later, this section of the curve is perhaps especially re levant for some cities.Incidentally, the societal preference curves ( c

and c) show that there is no equilibrium below point O on the equity dimension. Thisopens for the possibility of highly unstableconditions in such locations, as perhaps rep-resented by the free fall of some inner cities.Also, output is maximised by a societal pref-erence which is completely indifferent tosocial justice ( c). The overall implication of the shape of this left-hand section of thecurve is that severe social inequality has negative effects on output and the produc tivesystem. Therefore, improvements in equityand improvements in efciency are posi- tively related, up to a certain point. Thisargument can be extended by two different

visions of the overall relationship as shown in Figure 4. These are termed the Thatcher (T) and the Scandinavian (S) visions of theequity/efciency relationship and they couldexplain differences in economic performancein the two regions. They also suggest that the positive relationship holds up to a minim um threshold value of equity, whera fter the negative relationship sets in. This could po ten-

tially explain differences in econom ic performance am ong European cities, where there are markedly different levels of equity.

Figure 3. An expanded view of the trade-off between efciency (nationa l growth Y n) and equity ( ). Source: Castro and Jensen-B utler, 1997.


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EQUITY ISSUES 871

Figure 4. Different perspectives on the relationship betw een efciency and equity: T is the Thatcher vision and S is the Scandinavian vision. Source: Castro and Jensen-Butler, 1997.

In the next section, it is argued that, in thespatial context of the city, new argumentsappear which reinforce the view that here there is a positive relationship between eq-uity and efciency.

2.3 Spatial or Interpersonal Equity

Richardson (1977) outlines a number of the problems when treating equity as a spatialissue. Average per capita income for a statis- tical area says nothing about the propor tion of lower-income groups living in the area. The mix of public and pr ivat e goods varies

considerably between areas, affecting thevalue of the income criterion. Many variablesaffecting welfare are not reected in moneyincomes, such as educational levels and health indices. Also, size of areal unit can affect average income systematically. Over time, migratio n can result in changes in aver-age incomes, without any real correspondingchange in incomes for the social groups in the area. Depending on how a city is denedareally, declining GDP by residence can be the result of out-migratio n of wealthier househ olds from more central areas to thesuburbs. In a policy context, area-based sub-sidies will not necessarily go to the poorest inhabitants in an area as typically the recipi-en ts will be the more dynamic and en-

trepreneurial, with higher incomes. Thus theconceptual and empirical divergence between people prosperity and place prosperity isconsiderable.

3. The EfciencyEquity Relationship inthe City

High densities of economic activity andsettlement can affect interactions between efciency and equity signicantly and systematically. These interactions are mediated pr im arily though the labour and housingmarkets (Badcock, 1984), and also through

accessibility to both employment and ser-vices. These effects appear to be reinforcedwhen the more recent transformations of theurban economy are considered.

3.1 Urban Labour and Housing Markets and City Marketing

The left-hand ends of the curves in Figure 4are especially interesting. At the level of theindividual, it is well established that poverty,ill health, infant mortality and early deathvary strongly together (Leon et al. , 1992;Phillimore et al. , 1994; Wilkinson, 1994). It is also well known that unemployment andqualication level vary together (Gregg,1993) and that poverty relates directly to


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choice of education and thereby quali-cation. Thus, poverty will tend to increase the numbers of people with low levels of qualications in the labour force. There issubstantial evidence that indicates strong re-lationships between income, poverty, unem- ploym ent, social deprivation, sub-standard housing and cr iminality (Hirscheld andBowers, 1997). These poverty-related factors have clear negative effects on both the supply and produc tivity of labour . Fur thermore, they are essentially urban phenom ena, whereconcentration and spillovers reinforce the negativ e effects of povert y.

Poverty in an area will tend to depress

wage levels, which can have the effect of stimulating labour-intensive production. Thisis the case of the inner-city sweatshops in theclothing industry. At the same time, the phenom enon of the working poor appears in these areas, contri buting to the im age prob-lem. Innovation and technological changewill be retarded, making the inner cities lessattractive for innovative rms. Labour train-

ing and skill improvement will also tend tosuffer as employment opportunities are per-ceived as dead-end, unstable and uncertain.Low wage levels can also have a spillover effect on non-marginalised sections of thelabour market, where labour may be paid at a wage which is less than the value of i tsmarginal product. This in turn can createdissatisfaction and worker resistance, reduc-

ing innovation and even productivity.At the aggregate level, interactions between a low level of equity and econom icefciency are also apparent in the cities. A polarised income distribution creates a poor image for a city, making it difcult to attract growth industries that rely heavily upon key person nel with higher incomes and a middle-class lifestyle. City marketing, where cityimage is crucial, is of increasing importanceas a factor a ffecting urban economies(Jensen-Butler, 1996b; Krantz and Schatzl,1996). This image has a physical as well as asocial component, for example in the form of decay, slums and abandonment. Dundee andLiverpool are two cities struggling with this problem.

Bailey (1959) developed a model of theurban housing market incorporating demandinterdependencies, showing how income dif-ferentials in the urban population, through the effects of consum ption externalities,can resul t in excessively large areas of low-income, poor-quality housing. If a high-income area is adjacent to a low-income areain a city, then demand interdependenciesoccur at the boundary between the two areas.Properties on the low-income side close to the bounda ry have a prem ium because of their proxim ity to the high-income area,whilst those on the boundary on the high-income side have a pr ice discount . This

means that whils t property prices in theinterior of each area are comparable (beingensured by multiple occupancy in the low-in-come area), then at the bounda ry(P H 2 d ) , (P L 1 p) where P H and P L are proper ty prices for high- and low-incom e hous ing and d and p are the discount and prem ium, respectively. It is easy to see that if conversion costs to low-income housing,

c, are less than ( P L 1 p) 2 (P H 2 d ) then con-version will occur. The process will gradu-ally draw to a standst ill as the pr ice of low-income housing falls and high-income hous ing rises. Because of multiple ow ner-ship, the process will go too far in relation to the social op tim um where the interior valuesare equal. If there is in-migration of low-income families to the city and out-migration

of high-income families (which is not un-likely), this will affect house prices in such away that the process can continue for even longer. What is signicant, of course, is that income disparity fuels the process of urban decline.

The image problem is of ten compounde dby the real social costs of high levels of cr iminality and drug abuse, lead ing tosocial unrest. The urban riots in the UK in the early 1980s were a direct response togrowing poverty and inequality (Keith, 1989)and the Conservative governments response had a clear aim of creating a more equitabledistribution of income in inner cities. Povertyalso increases the demand for public service provision, creating a scissors effect of rising


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EQUITY ISSUES 873

needs agains t a background of a lim ited abil-ity to raise local nance (Mouritzen, 1992).

Green (1996) examined indicators of pov-erty and wealth for 459 UK local authoritydistricts (LADs) in, 1981 and, 1991. On 2 out of the 3 poverty indicators used (no-car househ olds and unem ploym ent), LADs in Glasgow, Liverpool, M anchester, Newcastleupon Tyne and 8 Inner London Boroughsappear in the lowest 15, as do Middles-brough, Hartlepool, Sunderland and South Tyneside. Between 1981 and 1991 povert ybecame increasingly concentrated in the bigcities. Some of the wealthiest LADs werealso to be found in the big cities, notably

London and Glasgow. She concludes that polarisation of the social structure and in-creasing segregation between rich and poor LADs in the big cities grew in the period. Acomparison with Levers (1993) work mod-elling competition in the European urban system using Cheshires (1990) urban prob-lem scores, reveals striking similarities. At the bottom of the European league table were

Newcastle, Sunderland, Glasgow, Liverpooland Teesside. Furthermore, most of them declined in terms of relative position during the 1980s.

3.2 Cities, Knowledge-based Production, theInformation Society and the New Global Economy

Space does not allow a detailed treatment of the role of the city in the inform ation societyand the globalised economy. However, in condensed form, the basic ideas are that cit-ies are now dominated by service rather than industrial production and their economic fu- tures are determ ined by their creative andinnovative capacity or knowledge-based pro-duction (Cheshire and Carbonaro, 1996).Innovative capacity has become the new

source of comparative advantage in the glo-bal economy. Ideas translate into production,or, in the formulation of Romer (1990), the produc tion function involves the stock of ideas, S , the stock of capital, K , and labour,L y:

Y 5 K a( SL y)12 a (3)

The produc tion function for ideas can bedened as:

S

5 d L s (4)

where, S

is the instantaneous rate at which

new ideas are produc ed; L S is the number of idea producers, (researcher workers); and d

is the rate at which they create new idea s. d

can

be a constant or, more realistically, a function of S . If existing ideas increase research produc tivity then S

is an increasing function

of S .In general terms, the rate at which new

ideas are created is given by:

d

5 d S (5)

where d and are constants. Thus, the pro-duction function for ideas is:

S

5 dL s S (6)

It can be seen that the production of newideas depends upon the number of re-searchers and the stock of ideas S which is

external to the individual. If . 0 there is aknowledge spillover, implying increasingreturns. In other words, knowledge spillsover between researchers. Romer considers the economy as a whole in aspatial term s, but these positive externality effects do not oper-ate uniformly throughout spacethey are highly localised and they are very urban.

Both L S and S are overrepresented in

urban areas, partly because of higher popu-lation densities and partly because of institu- tional overrepresen tation, both insti tutionsemploying researchers and those stockingknowledge. Furthermore, the interaction between researchers ( L S ) and productive labour (L y) also constitutes a spillover effect. Areaswith concentrations of well-qualied, recep- tive and exible entrep reneurs and em - ployee s will gain advantage. The know ledgespillover effect depends on intensity of interchange of ideas, which despite the Inter- net, re tains a fundam ental spatial (locality)dimension (Castro et al. , 1998). Creativitycan be dened as the combination of existinginformation in new ways, so that the most creative areas, typically cities, will be those


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where the number of potential combinationsis greatest. This is enhanced by local com- petence and good communications, both in- ternal and externa l, as well as a varied and hetrog eneous cultural, sc ientic and inform a- tional enviro nment. The intensity of local presence of the two types of labour , a largestock of knowledge and the potential for interaction is enhanced by the existenceof high-quality human capital, localentrepreneurial vitality, synergies between actors and the existence of local networksgenerating positive externalities. T hese fea- tures are clearly affected by the am enityvalue of the city, where positive assets in-

clude low levels of environmental and urban degradation, well-developed cultural facili- ties, the intangible but im portant goodquality of l ife, together with a low-riskenvironment and an environment where interpersonal accessib ility is high and socialand other forms of interaction frequent. In addition, high quality housing with goodaccessibility to the central areas of the city

is important. Cheshire (1995) explains therecentralisation of urban populations in northe rn Europe in the 1980s as a processof cumulative causation. Those cities withadvantages in attracting skilled residentswill enter into a cumulative growth regime.He writes:

while local policy could do nothing to

stem the loss of industrial jobs, it is more plausib le to construct urban policy that can intervene in ways which make cities m oreattractive places in which to live, especially for highly sk illed workers and can create conditions which w ill attract serviceemployment (p. 1058).

In other words, in the new urban economy,cities can create and develop localised positive externalities ra ther than treating them ascases of market breakdown.

It is here where there the link to equityquestions arises. The negative effects of seri-ous social inequality are also highly localisedand distinctly urban. For the reasons outlinedabove, cities with high levels of social in-

equality will, in general, be less able to attract the labour that generates ideas and thelabour that translates these ideas into innova- tions. They will not be strong learning envi-ronments where the quality of human capitalis rising fast . They will usually be urban environments where knowledge spilloversare more limited, as interactions between individuals in a society that is highly polar-ised are more limited than between individu-als in a more egalitarian society. Therefore, will be smaller. If . 1 there are increas-ing returnsi.e. the productivity of researchincreases with the stock of existing ideas. Put simply:

5 f ( ) for , c (7)

where, is the level of equity in the city and c is a lower critical limit. As equity declinesbelow c, then declines.

When falls below 1, diminishing returnsset in and cumulative growth will not occur.Similar arguments apply to a service econ-

omy. Here, more face-to-face contacts between supplier and consum er are necessary than in an industr ial econom y. Substa ntialsocial inequality will reduce levels of contact and increase transaction costs.

Other factors can reinforce these effects.Equity may enter into the utility function of the well-qualied, middle-class person whochooses to live in an attractive urban en-

vironment. He or she gains satisfaction from the know ledge that the poores t members of society are provided with a minimum level of protec tion. Alternatively, risk-averse individ-uals are prepared to pay an insurance pre-mium to ensure that they receive a minimum income with certainty rather than a higher income with a degree of uncertainty. As longas this premium is less than the differencebetween the two income levels, then the indi-vidual will prefer to pay the premium which can, for example, include socialsecur ity payments or taxation for th is purpose.

In the following three sections, urban policy is exam ined in re lation to efciencyand equity issues.


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EQUITY ISSUES 875

4. Urban Policy (1): Market Breakdown

One of the important reasons for urban pol-icy is market breakdown, where public inter-vention is required to attain optimum levelsof production or consumption of a good.

The thre e pr incipal causes of market break-down discussed below are inherently urban and they also have important equity dimen-sions.

4.1 Externalities

Externalities are untraded interdependencies,costs or benets that are not incorporated

into market price, which creates a divergencebetween the social optimum level of con-sumption or production and the m arket-deter-mined level. Figure 5 illustrates the case of a negativ e consum ption externality, where there is a diverg ence between margina l pr i-vate costs and marginal social costs, createdby the externality. The public sector can impose a Pigovian tax ab to reduce con-

sumption from q1 to q2, equating marginalsocial benet (msb) and marginal social cost

(msc). Standards, including development controls and land-use restrictions, can also beused to reduce output in the case of a negative produc tion external ity . Figure 6 show s the case of a positive consum ption external-ity, where there is a divergence between pr ivate (m pb) and social margina l benets. In this case, the public sector should subsidiseby ab in order to raise consumption from q1 to the optim um level q2.

Externalities are inherently spatial for four reasons. First, they are usually highly lo-calised, as with a polluting factory, an airport , a noisy motorway or a congested roadintersection. Secondly, they are usually sub-

ject to distance decay: their effects diminishwith increasing distance from the source of the externality. Thirdly, the aggregate costsor benets of the externality depend on thedensity of population in the area surroundingits location. Finally, particularly in the caseof positive externalities (and public goods) their effect can sometimes be conditioned or limited by the geographical extent of a juris-

diction. Their basic spatia l nature indica tes why

Figure 5 . A negative external ity (msb 5 marginal social benet; msc 5 marginal social cost;mpc 5 marginal private cost).


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Figure 6. A positive externality.

externalities are also inherently urban. Cities

are centres of both production and consumption and high population densities give rise to high levels of interaction and associated highlevels of external cost or benet. Distancedecay means that marked differences in external costs and benets can occur over re la- tive ly short distances, making social justiceissues very visible and very political. Also, jurisdictions tend to be packed more closely

in urban areas.Externalities and equity interact in a num-ber of w ays. A negative externality is a socialcost paid by others than those directly in-volved in the transaction. In general, low-income rather than high-income householdswill be located around the source of a negative externality. This is because the external-ity will have a negative effect on propertyand land prices, well known from studies of airport noise where hedonic prices relating to the enviro nm ent are derived from proper ty pr ices (P ennington e t al ., 1990). Filteringmechanisms in the housing market will tend to loca te low-incom e families close to theexternality, where they will pay the externalcosts, not infrequently in terms of deterio-

ration in health and higher mortality. The

implication is that urban policy designed tointernalise the cost of the externality, or re-duce consumption or production throughstandards enforcement, will disproportion-ately benet low-income groups and low-income areas. This is a case of publicintervention in the market improving bothefciency and equity.

The spatia l effects of a positive externality

in terms of equity are more diffuse. Urban renewal can, for example, benet all socialgroups, but may affect property prices posi- tively so that ltering upwards occurs and higher-income groups enjoy the externalbenets disproportionately. This is certainlyone element in the gentrication of former low-income areas in the centres of cities.However, some types of subsidy could have the consequence that the benets are spreadmore w idely, both in social and spatial terms.

4.2 Public Goods

Public goods are dened by their consumption characteristics: no one can be excludedfrom consuming them and they are non-


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EQUITY ISSUES 877

Figure 7. Price and quantity supplied for a public good.

rivalrousone persons consumption does not detract from anothe rs. Provisio n of many public goods will only occur in urban

areas, as here there is sufcient demand for their provisi on. Parks, enviro nm ental im - provem ent, refuse disposal, street lighting , trafc contro l as well as police protec tion and collective heating systems are examplesof public or quasi-public goods.

Left to the market, provision of publicgoods will usually be less than optimal, as there is no incentive for consum ers to declare

their willingness to pay because they can potentially free-ride. Furthermore, af ter therst consumer is supplied (with a xed quantity) the marginal costs of supplying the next consumer are zero, implying that free pro-vision is the optimal pricing strategy. Figure7 shows how the quantity supplied of a pub-lic good should be determined. Three indi-viduals demand curves are represented byD 1 D 3, reecting willingness to pay, in turn partly reecting differ ent income levels.Without public intervention, consumer 3 willconsume q1 and the other two consumers willfree-ride. The rst observation is that free-riding is more likely to occur in cities withstrong social inequality. By implication,measures to prevent free-riding (as with USzoning laws or Swiss regulations on resi-

dence) will be more developed in such cities. The level of provision will , however , besub-optimal as, by summing the three de-

mand curves vertically, a collective willingness- to-pay curve is obtained indicating an optimal level of consumption at q2. The ef-fects on equity depend on how the publicgood is nanced. Strictly speaking, if user paym ents are involved, then as everyone usu-ally pays a marginal cost which is equal toaverage cost, the effect is regressive as the pr ice does not reect margina l private

benet. If payment approximates willingness to pay throug h a local or national tax system, then the effect is neutra l. If the tax system utilised to nance the public good is pro-gressive, the effects on equity are positive.Clearly, public good provision can be used as part of an urban policy strategy for increas-ing equity. For low-income households, free-riding is, however, a real alternative.

4.3 Monopoly

Finally , some types of public serv ice pro-vision have the character of a natural mon-opoly, where average costs decline over theentire range of production and therefore mar-ginal cos t is always less than average


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cost. This means that a single supplier is, for technical reasons, the most efcient market structure. Marginal cost pricing in this casewill result in the monopoly making a loss asaverage costs are higher than average rev-enues and the decit will have to be coveredby subsidy from taxation revenue. Here the possibi lity for redistribution again appears,as in the case of public goods. More recently,governments have tended to utilise averagecost pricing principles eliminating the needfor subsidy and thereby reducing the redis- tributive effects. What does seem clear is that pr ivatisation of natura l monopoli es will not tend to prom ote increased equity.

Critique of these arguments for public intervention based on market fa ilure has comefrom the public choice school (for example,Downs, 1957). In the planning context, Web-ster (1998) has presented a summary of the pr incipal points of criticism. He concludes, however , that in the city traditional Pigovian pr inciples in welfare econom ics do seem to hold their ow n against cr itique from publicchoice theory and Coases negotiated market solutions (Coase, 1937). This is because of big group sizes, high transaction costs andunclear property rights in urban areas. Per- haps one should add to the cr itique of Coases analysis applied in the city that, in conditions of marked power asymmetry (for example, where one of the parties is a neigh-bourhood of low-income households and theother a multinational company), then negoti-ated solutions will also tend to break down and the poor will pay.

No treatment of equity and public goods in the city is complete without br ief consider-ation of the Tiebout hypothesis (Tiebout,1956; Oates, 1969). Tiebout considers theclass of public goods which are local in nature (they are supplie d only in a specic jurisdiction and there are no spillove rs). Hisconsumer-voters are perfectly mobile andwill move to the jurisdiction where the tax-service mix corresponds to their preferences.Each ends up paying a tax-price for a service that corresponds to their margina l benet andall marginal benets are therefore equal in

the jurisdiction, as

MB i 5 pQ

n(8)

where, MB i 5 marginal benet accruing to person i ; Q is quantity provided (consumed);

p is its unit price; and n is the number of taxpay ers.It follows that the efcient level of pro-

vision of the public good is given by adding the (identical) n individual demand curvesvertically:

o i MB i 5 MC (9)

Then for a unit of the public good:

oi MB i 5 nM B 5 n( p/n) 5 p 5 MC (10)

Each voter/consumer pays p per unit of the public good, corresponding to his valuation,and incidentally, creating a L indahl equilib-rium. By choosing to live in a particular location, each person chooses a specic pr icequantity combination and has, in es-sence, revealed his preferences. However,given the fact that local expenditure (in the

US) is nanced pr incipally from proper ty taxes, then free-r iding can occur if new en- trants build cheap houses . The so lutio n to this dilemma is the US zoning arrangem ent,which dictates minimum lot sizes.

One consequence of the Tiebout model is that there is no income redistr ibu tion: you pay for what you want and zoning laws prevent free-riding. To the extent that

cheaper housing exists in areas with moreexpensive housing, then some income redis- tributio n will occur, though in the long run the value of the better services will be capi- talised, eliminating the income redistr ibut ion effects. One further aspect of the zoning lawsis the exclusion of blacks and other ethnicgroups from homogeneous suburbs: to the problem of lack of income redistr ibution isadded that of discrimination. A local pro-gressive income tax will clearly undermine the processes modelled by Tiebout.

It seems that suburbs do show some ten-dency to be homogeneous and particularly in the case of the US there is some suppor tingevidence for the Tiebout hypothesis. Europeis perhaps different, as there is a tendency


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EQUITY ISSUES 879

for the state to require similar if not identicallevels of public good provision in all juris-dictions. H owever, some traces of the modelcan be found. In the Greater Copenhagen region, the richer northern suburbs tend to have lower rates of municipal income tax (a propor tional tax) whilst maintaining mini-mum levels of publ ic service provision where required by the state, and lower levelsof service where the municipality has discretion. Inux of poorer households who might wish to benet from the tax regime is limitedby development controls on social housingand at the same time the cost of private housing is high (A ndersen, 1987).

5. Urban Policy (2): Equity

Urban policy has strong origins in the politi-cal will in many city administrations to re-duce social inequality and solve problems of poverty. Equity and efciency questio ns can be examined in this light. The traditionalbackbone of much urban policy, equity, is

being replaced by a more entrepreneurialurban policy embracing ideas of competition between cities (Jensen-Butler, 1996a). This has led Edw ards (1997, p. 825) to comment that

one is struck by the extent to which the problem of urban deprivation has disap- pearednot from cities, but from theliterature.

There are clear politi cal reasons why cities tend to get involved in issues of equity.When reallocation of income through mea-sures that operate at the national level does not succeed in solving serious problem s of poverty and depriva tion, the poor and de- pr ived , who are re latively immobile, turn tolocal politicians and administrations for solutions to their proble ms. These proble ms can be very severe, as experience in British andAmerican cities suggest (Lawless, 1989;Bradbury e t al. , 1982) and distributionalquestions emerge as a key political issue in cities. In addition, larger European cities have traditionally been strongholds of SocialDemocratic parties with a policy orientation

towards redistr ibu tion of income. Equity is-sues are rst examined in relation to systemsof taxation and then in relation to service provision policies.

5.1 Systems of TaxationBefore examining specic policies, initialconsideration is given to the concepts of horizontal and vertical equity in re lation to the ability to pay and benet principles, relat-ing in turn to the efciency and equity of systems of taxation and benet provision. This is not the place for a major digres sion into the theory of taxation, but some con-

sideration of the central issues is appropriate.

The city and macroeconomic policy: incomemaintenance policy. The greatest singleinuence on income distribution in citiesarises from changes in the system of tax-ation, income transfers and public expenditure at the national (and to a more limitedextent at the European) level. Taxation and

transfer incomes can reduce dispar it ies in disposable income markedly (Atkinson,1996). As households of different socioeco- nomic status are not distr ibuted random ly in space, spatial equity will also be affecteddirectly.

Spatial ows of public-sector revenue andexpenditure arising from policies at the national level which in them selves do not have

explicit spatial objectives, are substantial in advanced economies. The net ows are typi-cally markedly larger than public expenditureows that have a specic and intended spatial bias. In general term s, the net balance of such ows is posit ive for poorer areas, asricher areas have a higher tax incidence and poorer areas have propor tionately a greater number of recipients of transfer incomes.Oosterhaven and Stoffelsma (1990) present results to this effect for Dutch regions andHansen and Jensen-Butler (1996) document similar ndings in Denmark.

This general pattern of decit and surplusis to be found at low levels of spatial disag-gregation, including small areas within cities,where per capita disposable income can be


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affected markedly by changes in welfarestate provisions and taxation levels, as shown below in section 7. Given that state income tax systems are generally progre ssive, taxreductions will favour rich areasthoughwhen indirect, induced and dynamic effectsare taken into account, the picture can be-come less clear (Jensen-Butler and Madsen,1998). Correspondingly, reductions in trans-fer incomes will hit poor areas hardest. This partly explains Greens (1996) observation that social polarisation within major cities in the UK grew in the 1980s, being the urban counterpart of a more general tendency for income inequality to grow substantially in

the UK in the 1980s, unlike the trend in most west European countries (Atkinson, 1996).

One reason why a high number of Britishcities appear in both Cheshires (1990) andLevers (1993) studies at the high end of the problem index scale is the lower level of income transfers in the UK compared toother European countries. In 1994, income transfers to households constit uted 16 per

cent of GDP in the UK, 21 per cent in Denmark, 26 per cent in Sweden, 19 per cent in Germany, 28 per cent in Holland and 25 per cent in France. Taking all social expend i- ture (a denition based on harm onised datafrom the EU), the gap is smaller. In 1995, this expend iture constit uted 28 per cent of GDP in the UK, 34 per cent in Denmark, 36 per cent in Sweden, 29 per cent in Germany,

31 per cent in Holland and 31 per cent in France (D anm arks Statistik, 1998, pp. 18 19).

A specic urban bias can, however, enter policie s based on national transfers. First, there is the positive effect on equity within cities arising from nance made availablebecause of special needs. In the UK, onecomponent of central government grant-aid has since 1990 been Standard Spending As-sessments whereby a part of grant allocation is based upon a formula for needs assess-ment. Secondly, there are activities for which there is local author ity discretion in spend-ing. Above a basic national minimum stan-dard provision, cities can choose to spendmore or less in areas which create a more or

less even distribution of income. Social hous-ing, education and nursery provision often provide exam ples of these activities .

Local taxation and expenditure. The general pr inciple that public expend iture whichbenets a population should be nanced by taxes raised in the same population helps tocreate budgetary discipline. H owever, a num -ber of problems render this principle difcult to apply. Firs t, the need for public expenditure is not re la ted to the ability to nance it.Secondly, substantial differences in provision of basic services would arise in different local authority areas if it were applied rigor-

ously. Thirdly, budgetary decits are gener-ally not permitted at local authority level,limiting local authorities capacity to respond to changes in the busines s cycle in a differen- tiated manner.

At national level in 1993/94, UK centralgovernment grants constituted about 56 per cent of local authority income (Blackman,1995). In Denmark, in 1997, 67 per cent of

local authority income came from statesources, whilst the power of decision over 55 per cent of public expenditure, nominally at least, rested with local authorities. In Latin countries in Europe, the percentages of central govern ment nance at local govern ment levels are signicantly higher and decision-making remains very centralised. Throughout the past two decades, there has been a ten-

dency for responsibility for service provision under the welfare state to be delegated tolocal authorities who thereby, nominally at least, gained greater power of decision over expenditure. This has led to pressure for increased central government control, bothdirect and indirect, on local government spending. The UK (Blackman, 1995) andDenmark (Hansen and Jensen-Butler, 1996)both provide examples of this trend.

Taxation for the purpos e of nancing transfer incomes to low-incom e householdsis, in general, a national and not a city-levelissue. Hence, the ability of the city to changeresource endowments of households by di-rect reallocation of income is severely lim-ited. Even where there appears to be some


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EQUITY ISSUES 881

degree of local nance of income support, asfor example in Denmark, this is in realityillusory, as entitlements are determined at national level and the sta te nances 50 per cent of expenditure, the rest being met by themunicipality. Hence, in general, cities can only address problems of distribution by intervention in the market, inuencing pr icesand investment decisions and providing pub-lic goods. The second welfare theorem indi-cates that this wil l lead to inefciency,implying a trade-off between efciency andequity. However, this is not always the case.

I t is far f rom clear whether or not the

raising of local tax revenues to provide sub-sidised public services creates a more equitable reallocation of income. This depend s on a number of questions:

(1) Tax inc idence : the ques tion of who pays? This in turn relates to the geo-graphical location of taxpayers and their positio n in the econom y together with their ability to pass on taxation to others(in the case of business taxes).

(2) The nature of the local tax system,whether it is progressive, proportional or regressive.

(3) The distribution of benets by incomegroup and their geographical location.

(4) The types of public service which are provid ed by the city authori ty and thosewhich are provided directly by the state.

These questions are complex and vary sub-stantially between countries. For example, in the UK local taxation is based on the value of proper ty. It is not paid by a part of the local popula tion in any area, but is reasonably progre ssive in re lation to those who do pay.In Denmark, local taxation is on incomes,using proportional tax rates, whilst state in-come tax is progressive. Small changes in tax thresholds can affect the distribution of disposable income. On the expend iture side,some countries have highly centralised de-cision-making and nance. For example, in Portugal the state determines the location andsize of primary schools, which in other countries is a municipal respon sibili ty .

These issues can be view ed in relation to

two pr inciples of equity. Horizontal equityrequires that individuals in the same circum-stances pay the same costs and receive thesame benets (equal treatment of equals).Vertical equity determines the distribution of total costs or benets to people in different circumstances (unequal treatment of un-equals). On the benets side, horizontal eq-uity requires that the same price is charged toall and that equal incomes pay equal taxes.Vertical equity is achieved when individualsreceiving different benets pay different amounts. For a private good, increased con-sumption involves greater cost; whilst for a

public good, those experiencing higher mar-ginal benets should, in principle, pay more. The importan ce of such issues is clearlydemonstrated by the fate of the highly re-gressive UK Poll Tax, having a universalincidence. Urban rioting was provoked by the tax and by 1992 local counci ls hadissued 11 million summonses and had 1.5billion outs tanding as a consequence of widespread civil disobedience.

A city which has a local tax system whichis progressive, having a substantial grant in-come from the state based upon progressive taxation, and which locates free or subsidised public services in low-incom e areas, is prac- tising a policy of income redistribution at city level.

However, the d ifculties relating toidentication of incidence of benets and taxation do not end here . Any analysis must confront the problem of whether to assessonly the direct effects of changes in taxation and service provision or whether to incorpor-ate the indirect and induced effects. In ad-dition, there will be long-term dynamiceffects on the national economy as wagerates and employment levels adjust. Thesedynamic effects will also have a spatial di-

mension (Jensen-Butler and Madsen, 1998). Furthe rm ore, analysis should be undert aken in an interregional framework, as there can be extra-urban spillover effects.

5.2 Service Provision

Any type of public service provision involves two main questions. First, in the


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absence of market signals, the efciencyquestion is whether or not the service isbeing supplied at the optimum level, where this level is dened as that which equatesmarginal social benet with marginal socialcost. The second question deals with theeffects of the service provision on equity.Here, the effects of the policy on incomedistribution are of prime interest but, in prin-ciple, unpriced benets and costs should alsobe included. These two questions are exam-ined in relation to three traditional areas of urban policy: housing, transport and special needs. In principle, simila r analyses could be

applied to other policy areas, such as edu-cation and health, though these typically have larger nationa l components of provision.

Geographical location also affects equityfundamentally, in two ways. The location of public services in low- or high-income areasaddresses distributional issues directly. Hereany city authority will face a dilemma posed

by the demands of horizontal and verticalequity. Also, location patterns of interrelatedactivities (residence and shopping, residenceand work, for example) affect equity through travel and co-ord inat ion costs .

In geographical studies, there has been along tradition for regarding accessibility as afundamental component of equity (Knox,1982; Hay, 1995). The typical approach to

this type of analysis has been cartographic.However, more recently, systematic attempts have been made to examine real accessibilitycosts and their incidence on different socialgroups in cities. Using data from Chicago,Immergluck (1998) found that reduction of spatial mismatch between jobs and unem- ployed people had a lim ited effect on em - ploym ent compared with other factors suchas occupational mismatch. However, Ongand Blumenberg (1998) did nd a strongrelationship between improved accessibility to employm ent and probab ility of ndingemployment for welfare recipients in LosAngeles. They were able to quantify thisrelationship and, in addition, to estimate theeffect of commuting costs on earnings for this group, which is necessary, they argue, as

the effect of job accessib ili ty on wages can- not be separated from its effect on employment.

Housing. Social inequality translates intospatial inequality in cities primarily through the hous ing market (van Weesep, 1996). Fur- thermore, housing has been show n to play amajor role in the creation and maintenance of deprivation (Lee, 1994). The housing market is also the prime agent in social segregation along ethnic as well as social class lines (Rexand Moore, 1967).

Housing policies have traditionally been

heavily equity dr iven , the aim being to en-sure that everyone in the city has affordable hous ing of a minim um quality. As there is astrong correlation between sub-standard hou-sing and poverty, this is an important area for the applicat ion of equity-based policie s. Fur- thermore, it is typically an area for whichcity authorities have direct responsibility.

There are also efciency ground s for pub-

lic intervention in the housing market. Capi- tal market imperfections include housingcredit agency discrimination against low-in-come groups or refusal to nance purchase of hous ing in certain areas. There are subs tan- tial problems of imperfect and asym metricinformation in relation to property purchase. The supply of housing is highly inelasticwhich means that any sudden increase in

demand will create major price increases anda very limited increase in supply of housing, having negative consequences for low-income groups. There are also substantialexternalities in housing consumption, as seen above. The incentive to improve property in a slum area is weak because even i f oneowner decides to improve his property, thearea will remain dominated by slum conditions unless there is co-ope rative behaviour amongst a large number of actors. Conse-quently, there is little incitement to act. Thebehaviour of neighbours affects housing pur-chase decisions, which can be clearly seen in an area experiencing gentrication. In theface of these market conditions and with theaim of pursuing equity goals, three types of hous ing policy have developed.


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optimal levels of provision and consumption,indicating the need for public intervention.

Also, transport is often regarded as a merit good, implying the need for public intervention to ensure equalit y of access at a mini-mum level of cost and quality. Given theexistence of substantial externalities andgiven the high xed costs of entry into some transport modes, which prom otes monopol y,it is unlikely that the market will create an efcient solution . Also, given the strong relationship between incom e and car ownership,it is impossible for an equitable solution tobe created in urban transport. City transport

policy is therefore usually dr iven both byefciency and equity considerations.

The case for public intervention on efciency grounds alone is strong. One strat-egy is to internalise the external costs, towhich end a variety of strategies is availableincluding road pricing, parking charges and petrol taxation. The distr ibu tional effects of these policies are far from clear. Policy-re-

lated changes in travel behaviour will in-volve time and monetary costs and some journe ys will not be made. The incidence of these costs on different income groups isunclear. However, the poorer households have tended to re locate in the periph ery of cities. Industrial and area-demanding serviceemployment (such as wholesaling) has donelikewise, which means that low-income

househ olds are faced with longer journeys towork by car. These journeys often must takecircular and peripheral routes or cross-cityroutes, not served well by public transport.Hence, road pricing and especially petrol taxation can increase income inequa lity. One possibl e consequence of an electronic cordon around the centre of cities in order to chargefor car use in the city is that property priceswill adjust to compensate, rising in the centreand falling outside the cordon.

The other main po licy alternative is sub-stantial investment in public transport, even involving subsidies which can be defendedon efciency grounds alone through re-duction of external costs of congestion and polluti on. This strategy will usually improveequality through increased provision of

cheap and more frequent services. A denser and higher frequency network will also help to overcome location disadvantage faced bylow-income groups. However, the strategy is not without proble ms. The attractiveness of bus-based solutions depends in part on sol-ution of congestion problems created by cars.Price elasticity for public transport is low andcross-elasticity to other modes is also low. Furthe rm ore, cross-elasticity with respect to tim e costs is higher than with respect tomoney costs. Marked reductions in priceswould, therefore, not increase use of public transport corresponding ly. Existing users

would increase their use, but the main equitygains would come from new users and in-creasing use of public transport may slow journey times. However , this type of policyinitiative would seem to be one where bothefciency and equity gains are possible. Thisis shown in Figure 8 as a shift in the trade-off curve from Figure 2 in a north-easterly direc- tion.

Spec ial needs. Social care for special-needsgroups such as the elderly, infants and thedisabled is a major task for local authoritiesand substantial equity issues are involved.Efciency in provision of care is difcult toestablish, as i t is virtually impossible tospecify either the nature or the value of thebenets, which is why cost effectivenessmeasures are frequently used for investment

analysis. Three interpretations of equity can be applied in this area: minimum standards;equal care for equal need; equality of access to care . A key issue is the distribution of costs, which rarely fall upon the individualsinvolved. Here equity issues come to theforefront, as market solutions will be highlyinequitable.

If caring is mainly left to close family or friends, then costs are not distributed evenly.Care externalities reect the concerns of oth-ers in society not directly affected by the need for care . If the city provides acceptablelevels of care for those with special needs, then satisfaction is derived by others in thecity. This is quite clearly the case in Scandi- navian societies where special-needs pro-vision is at very high levels, but it is less the


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EQUITY ISSUES 885

Figure 8. A policy-induced shift in the equityefciency trade-off curve.

case in the UK. There is no relation between

the need for care and the ability to pay for it and without major public-sector partici- pation, the burden of care is cer tainly not equitably distributed.

Providing for special needs by city author-ities is an activity that is principally equity-driven as benets are difcult to measure. It is , however, interesting to speculate on whether or not the image of a caring com-

munity based upon egalitarian access is a posit ive externality that could make a citymore attractive to inward investment andeconomic activity. In which case, the result of strong city policies in this area could alsobe as shown in Figure 8.

Service provision: genera l conclusions. These three examples illustrate that in theseareas of urban policy efciency and equity

issues are inextricably intertwined. Policiesdesigned to increase efciency can sometimes increase social equality and vice versa.

6. Urban Policy (3): Local E conomic Develop ment, th e Urban Policy of theFuture?

Many authors have suggested that urban

policy has entered a new phase of entre-

preneurialism (Harvey, 1989). The emergingentrepreneurial urban policy is one where the pr im ary concern is with long-term efciency,where the creation and enhancement of localised positive externalities becomes acentral goal of urban pol icy. Instead of correcting market breakdown, the emergenceof positive externalities is actively encour-aged, as these are related to increasing re-

turns and ultim ately to long-run grow th(Jensen-Butler, 1996a). Cities compete in-creasingly across national borders and comparative advantage is no longer based upon resources or cheap or productive labour, but on innovative capacity. External economiesare strongly associated with cities, so that thecities will become the major actors in the new globa l econom y. This in turn im plies that the main concerns of urban econom ic policy have become transform ed and include:

enhancement of innovat ion and creativity; improvem ent of the quality of human

capital; prom otion of entrepreneur ial vitality; prom otion of networks (networks involve

positiv e externalities);


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enhancem ent of am enity value and hous-ing in the cities to attract a high-incomeand creative labour force;

creation of synerg ies; risk bear ing.

In this approach to urban policy, increasedcompetitiveness of the city will create in-come and employment which, it is assumed,will increase income levels for the most dis-advantaged. As noted above, this is remi- niscen t of a Rawlsian approach to equity that will not necessarily create a more egalitarian income distribution. It is possible to interpret

Glasgows policy-based transformation of re-cent decades in this light (Lever, 1996). Two principal elem ents of concern arise from thisapproach to policy in relation to equity. First,it is not immediately clear that in the moreindividualised, entrepreneurial and less col-lective society there will be a continued pol-it ical acceptance of redistribution of thecitys rising income to those w ithout employ-

ment. Furthermore, the economic fortunesof individual cities will become increasinglydivorced from national economies, so that decisions about income transfer m ay well bemade more locally and at city level (Jessop,1991) . This can give r ise to substantia ldifferences in levels of income redistribution between different cities.

New forms of marginalisation and impov-

erishment may arise, more directly basedupon level of access to information networks,education and training and degree of entre- preneu rial vita lity . There is grow ing number of community telematics projects in deprivedareas of cities, designed to open the world of global information ows to underprivilegedyoung people. This is one response to the new challenges of marginal isat ion. Another response is to create fortied residentialenclaves as is occurring in many American cities, but this is a solution which is perhapsless viable in the long term as the worldoutside becomes increasingly dangerous.

As argued above, in the new knowledge-based and global economy, equity may be-com e even m ore im portant to ensureeconomic growth as the negative externali-

ties re lated to extremes of wealth in close proxim ity will reduce the value of the positive externalities upon which grow th increas-ingly will depend. However, the emergingsocial structure and political values in citiesmay well be less sensitive to recognition of this link.

Space does not allow consideration of interactions between equity issues and the thirddimension of urban policy, environmentalimprovement, but these may be considerable.

7. Research into the Equi tyEfciencyRelationship in the City

For a number of reasons, litt le work has been undertaken on the relationship between urban success in terms of economic performanceand equity in cities, despite the pressing nature of social problem s in ci ties. There is a paucity of da ta on income levels for sm allareas inside cities which permit analysis of levels or changes in equality over time. This

lack of data is even more problematic when it is remembered that disposable income is the best income measure to use for measure-ment of such changes. As the theoreticalanalysis above has shown, measurement of changes in levels of equality is complex,involving changes in tax and benet systems,as well as unclear issues concerning the inci-dence on different income groups of changes

in costs and benets as a consequence of other policy changes. However, if the bal-ance between efciency and equity at thelevel of the city is a key issue determiningcompetitiveness and future income levels, the problems must be addressed.

The follow ing exam ple of the city of Copenhagen illustrates the nature of the datarequirements and the problems involved in measuring changes in levels of equity. Theexample also suggests that analyses of equityin an urban context conducted at a high levelof conceptual and empirical generality, suchas Smiths (1994) case studies of equity in selected cities, are of limited value in thiscontext.

Greater Copenhagen has a population of about 1.7 million and is the Danish region


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EQUITY ISSUES 887

where income levels are highest. However,during the past two decades, Copenhagen hasbeen losing ground in terms of economic performance, with slower grow th in GDPand productivity than much of the rest of Denmark and other European cities (Jensen-Butler and M adsen, 1998). Convergence of levels of disposable income by region hasoccurred in Denm ark in the past tw odecades, with Greater Copenhagen perform-ing weakly (Jensen-Butler and Madsen,1998).

Greater Copenhagen is dened so exten-sively in areal terms that it is clearly a func-

tional unit. Thus, changes in levels of equityare not inuenced by out-migration from thearea. It contains three counties (Roskilde, Frederiskborg and Copenh agen) and the municipalities of Copenha gen and Frederiksbergwhich, exceptionally, also have the status of counties. At the lowest administrative level,Greater Copenhagen covers 50 municipalities, for which income data are available.

Data are also available for 65 smaller statisti-cal districts covering Copenhagen municipality, which has a popula tion of 483 000.

The data have been made avai lable by theLocal Governments Research Institute in Copenhagen (AKF) and they permit closer examination of some of the problems in-volved in measuring changes in levels of income equality. D ata for 1980 and 1995 for

the 50 municipalities were used. These datacover:

(A ) Taxable income(1) Gross personal taxable income from all

sources, including capital income and taxable social benets, such as unem - ploym ent benet.

(B ) Non-taxable transfer incomes(2) Child allowance.

(3) Housing subsidy.(4) Income support.(5) Supplementary pensions.(C ) Taxation(6) All types of taxation of income.(7) Specic labour market taxes.(8) Interest payments.

The data are available for seven social

groups (dened in relation to qualications)in each area. From these data, disposableincome can be calculated as 11 (2 1 3 1 4 1 5) 2 (6 1 7 1 8). Changes in the tax system have occurred between 1980and 1995, income support becoming taxableand specic labour market taxes being intro-duced. The data have been adjusted for thesechanges, but they do provide an illustration of the complexities involved with measuringchanges in income equality. Clearly, dispos-able income is the closest that one can get toa measure of equality that is purely income-based.

Copenhagen has been characterised as aredistributive city (Engelstoft and Jrgensen,1996). It is also a city in a highly redistribu- tive country where public expend iture is cur-rently at a level of 64 per cent of GDP, withvery high rates of taxation, tax incidencebeing 52 per cent of GDP. Table 1 showscalculations concerning income distribution in 1980 and 1995, where the units of analysis

are the 50 municipalities. Looking rst at gross income, the coefcient of variation based on the unweighted standard deviation and average increases between 1980 and1995, as does the coefcient of variation based upon the weighted standard deviation and average. This suggests a widening of income dispersion and increasing social in-equality. However, when disposable income

is examined, the reverse effect occurs. Tax-ation and non-taxable transfers have reversed the trend of widening spatia l (and social)income disparities at the level of gross in-come, creating income convergence. When the provision of social services, housing , transport, health and education is taken intoaccount, it is clear that large-scale redistribution of income is occurr ing in the city. Howfar this redistribution is related to macro-economic income redistribution policy and how far it is locally determ ined by city-level policy requires closer study.

A major problem when examining theeffects of taxation or service-level changeson equity is whether indirect, induced anddynamic effects are included in the analysis. Typically, they are not, as this involves a


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Table 1. Gross and disposable incom e in the 50 municipalities of Greater Copenhagen: averages andmeasures of dispersion, 1980 and 1995 (current prices)

G ross incom e D isposable incom e

1980 1995 1980 1995

Average (DKr) 69 022 162 259 38 152 91 467Weighted average (DKr) 68 095 156 241 39 837 90 952SD unw eighted 8 967 22 488 3 402 7 949SD weighted 9 863 25 118 3 944 8 118Coef cient of variatio n, unw eighted values (% ) 12.99 13.86 10.23 8.69Coefcient of variatio n, weighted values (% ) 14.49 16.08 9.90 8.93

Source: L ocal Governm ents R esearch Institute (AKF , Copenhag en) data bank.

more substantial modelling exercise. Jensen et al. (1996) have undertaken a model-basedanalysis of the spatial incidence of changesin local authority taxation and spending for the City (M unicipality ) of Copenha gen which includes the indirect and induced ef-fects. The City of Copenhagen faces a sub-stantial budget decit mainly because of the

high percentages of low-incom e and special- needs households living in the city. The problem which they exam ine is the spatialeffects of two different strategies to reduce the budget decit: reduction of publ ic expen-diture (in the city, not in Greater Copen- hagen) by DKr100 million or an increase in local taxation in the city by a correspondingsum. The basic geography of income levels

in the region is that in 1993 factor income per inhabitant by place of residence in theCity of Copenhagen had markedly lower val-ues than in the three surrounding countiesand the municipality of Frederiksberg, andwas even marginally lower than the nationalaverage. In terms of disposable income per inhabitant, the picture is almost reversed.Income transfers and taxation create the situ-ation where disposable incomes per inhabitant are higher in the city than in thesurrounding counties, though Frederiksbergmunicipali ty sti ll has higher per capitavalues.

Jensen et al. (1996) found that the cut in public consum ption reduces em ploym ent by316 persons in the region, of whom 143 areresident in the city and the rest in the suburbs

(but work in the city). In addition, there is asmall leakage effect to the rest of the country. The effects on disposable income aremodest: a reduction of DKr24 million (1980 pr ices), of which half fa lls in the city. Theeffects of a tax increase are different. Only96 jobs disappear, of which 36 are resident in the city. On the othe r hand, disposable in-

come declines by DKr57 million, of whichDKr51 million falls in the city. Thus, the taxincrease creates less unemployment in thecity region than the cut in public expenditure,but in spatial terms it reduces the equilibrat-ing effect of income transfers and taxation within the region as disposable income de-clines primarily in the City of Copenhagen.On the other hand, as a point of departure,

the city had a higher level of disposableincome than most of the rest of the region,because of income transfers and investment. These studies of Greater Copenhagen pro-vide a good example of the conceptual andempirical difculties involved when the con-cept of equity is operationalised in a specicurban context.

8. Conclusions There appear to be good theore tical ground sfor not accepting the traditional view of a trade-of f between efciency and equity in theurban context. In many situations, it appears theore tical ly that there may be a positiverelationship between increasing efciencyand increasing social equality, at least up to


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EQUITY ISSUES 889

some minimum level of equity, leading ideasback to Figures 3 and 4. This means that cities that ignore equity considerations riskinuencing their long-term economic per-formance negatively. Equity is inextricablylinked to urban policy, even if policy isdesigned to address efciency issues. Poli-cies designed to address m arket breakdown in cities have clear implications for social justice. Policies, such as those in elds of housing , transport and special needs, devel-oped primarily for equity reasons, often haveconsequences for efciency. M oreover, thedistribution of benets and costs on different

income groups and areas within the city can have consequences for equity other than those which were intended. The new en- trepreneu rial policy prole of many citiesraises questions of the need for newdenitions of equity and the adequacy of policie s designed to address new form s of social inequality.

There is clearly a pressing need for more

research on the rela tionsh ips be tween efciency and equity at the level of the indi-vidual city. This research task is consider-able, because of conceptual and theoreticaldifculties, data availability and problems of international comparison. The dimensions of the task do not, however , make it less urgent.Cities have traditionally been locationswhere equity issues have been addressed in

very concrete forms and this will continue tobe the case.

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