Urban and Regional Economics Prof. Clark ECON 246 Week #2.
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Transcript of Urban and Regional Economics Prof. Clark ECON 246 Week #2.
Agglomeration Economies
Externality in production. What is this?
Q=G(N)*f(K,L) N=indicator of city size or industry size
Note that the agglomeration effect, G(N) is external to the firms’ production function, f(K,L,D)
Economies of Agglomeration: G/N>0 Diseconomies of Agglomeration: G/N<0
Agglomeration Economies and Diseconomies
NN
IR to externalIR to externaleconomieseconomies
DR to externalDR to externaleconomieseconomies
Cost Cost (time)(time)
Urbanization Economies
N is size of city Cost savings from being in larger city.
Better business services (greater variety). Economies of scale in input supply for all
industries. Local labor market efficiencies
Complementarity (e.g., secondary labor market) Economies from interaction - Jacobs argument
Inter-industry knowledge spillovers How do we know these are eventually
exhausted?
Localization Economies
N is size of industry in which firm is operating.
This is clustering of firms in an industry e.g., Silicon Valley, Detroit, etc.
Sources Firm specific business savings due to scale
economies in intermediate inputs. Unique labor markets Knowledge spillovers (intra-industry)
Can lead to Incubation process Valuable initially, later erodes
Agglomeration in Marketing Shopping externalities
Why do these exist? Imperfect substitutability Complementarity in goods
Shopping malls Retail clusters
These have been changing Why and how?
Article by Ray Vernon
Vernon looks at NYC in the late 1950’s and looks at a number of its disadvantages: No natural resource advantage high relative wages costly commuting expenses declining importance of port
Yet certain types of companies continue to locate there.
Why?
Common Characteristics
Establishments with low overhead. Why? Look at Tables 1 and 2
They face an uncertain future Survival requires ability to adapt quickly.
They continue to rely upon face-to-face contact Why not other forms of communication?
Look at some of his examples
Small dressmaking shops Rapidly changing environment. Need to meet with specialists from other
firms frequently. Military electronics
Products are unique and change rapidly. Printing
Unique jobs Publishing
Use of specialists
Parallels to Corporate HQ’s
Many firms have their corporate headquarters in NYC. 156 of Fortune 500 in 1958.
They face uncertain future. Corporations need to make use of
banking, economic, financial, legal, accounting specialists.
Advantage of being near Wall Street. Need to be able to respond quickly.
Why firms leave?
Advantages can erode. Example of insurance companies.
As technologies mature, some activities are get exported to lower cost production areas. Radio example.
As industry grows, pull to lower cost regions grows. More later on this.
Insights from article
Vernon Why look at such an old article? Insights for today? Are things changing?
Empirical Evidence on Agglomeration Economics
MSAE emphasizes empirical tools. We scratch the surface here.
Text gives other studies out there Briefly look at findings of one paper that
estimated agglomeration economies. Looked at both urbanization and localization
economics I haven’t assigned this, but for those who
are interested, the citing is: Ronald Moomaw, “Agglomeration Economies: Localization
or Urbanization: Urban Studies, 1988, Vol 25, pp. 150-161.
Overview of Moomaw
Notes that single measures of agglomeration in a production function can be misleading. Should separate urbanization and localization
economies. Classifies 2-digit manufacturing
industries according to their degree of localization (clustering near firms in same industry) and urbanization (clustering in larger urban areas).
Empirical Approach
Take a specific form of the production function. Assume specific form for urbanization and
localization economies. Manipulate this equation so that it can be
estimated. Mathematically derive a labor demand
function based on marginal productivity theory of production.
Estimate parameters of urbanization and localization.
Findings
Most urbanized industries typically have significant urbanization and/or localization economies.
Least urbanized industries have no urbanization or localization economies.
Agglomeration economies are primarily localization economies.
Some evidence of diseconomies of urbanization.
Overview of Additional Empirical Evidence John Quigley article – “Urban
Diversity and Economic Growth” reprinted from Journal of Economic Perspectives, 1998 (Vol. 12, No. 2) pp. 127-138.
Presented by Mike
History of Urbanization
Look at figure in book (2-4) Urbanization at about 7% in 1800 Urbanization at about 75% by 1990.
Variety of factors at work Rapid acceleration of Urbanization during Industrial
Revolution Agricultural Revolution Manufacturing Revolution Construction Revolution
Mr. Otis’ contribution Transportation Revolution
Inter- and intra-city All were necessary, none was sufficient to generate urbanization.
History of U.S. Urbanization:Centralization and Concentration
CentralizationCentralization DecentralizationDecentralization
19201920
ConcentrationConcentration DeconDecon ConcentrationConcentration
19701970 1980198017901790
Brief update of metro/nonmetro growth patterns for 1990’s Long and Nucci (Environment and
Planning A, 1997, Vol. 29) Show that nonmetro areas are still
growing slower than metro areas (ie., similar to most historical time periods)
However, growth in nonmetro counties is accelerating and growth in metro counties is decelerating.
Thus: Some similarities to 1970’s trend.
Reasons for Decentralization Automobile and truck have led to
suburbanization of population and employment.
Income growth and blight-flight process have reinforced the process. More later in semester.
Reasons for Deconcentration in 1970’s. Gerald Carlino evaluates this
phenomenon “Declining City Productivity and
the Growth of Rural Regions: A Test of Alternative Explanations” Journal of Urban Economics, 1985,
Vol. 18, pp. 11-27. Presented by Rose
Limiting Factors on City Growth
What factors limit size of cities? Internal scale economies Agglomeration economies Market size and transportation expenses Congestion and compensating differentials
What about the role of telecommunications? Should these strengthen or weaken pull towards
cities? Briefly review paper by Gaspar and Glaeser.
On reserve, but I have not assigned it.
Insights from Gaspar and Glaeser
“ Information Technology and the Future of Cities”, Journal of Urban Economics, 1998,Vol. 43, pp. 136-156.
Evaluates whether information technology will ultimately make it unnecessary to locate in cities
ie., move to a “spaceless world” Two opposing forces:
Substitution effect: Telecommunications innovations substitute for face-to-face meetings.
Scale effect: Telecommuncations innovations increase frequency of contact, and hence can increase demand for face-to-face meetings.
Thus: This is an empirical issue
Overview of Model Theoretical Model of Interactions:
Describes choice process whereby an individual confronted with project with expected value (ie., return) must decide:
Do this privately (without making new contacts) Do this jointly with new contacts with another person
If joint: Face-to-face (high intensity meeting) Telecommunications (low intensity meeting) Discontinue contact
Develops equilibrium conditions and then does comparative statics to evaluate impact of telecommunications advances on equilibrium
Theoretical Findings: As telecommunications improve, more
initiated contacts will lead to more exclusive telephone relationships. (Substitution effect)
As telecommunications improve, there will be more initiated contacts, since expected return from contact increases. (Scale effect)
Conclusion: If substitution effect dominates: Less need for city
locations If scale effect dominates: More need for city location
Empirical evidence Telephones and distance
U.S. evidence: In mid-1970’s, more than 40% of phone calls made to
places within 2-mile radius, and more than 75% within 6 mile radius.
Japanese evidence: #calls between 2 perfectures=f(pop, income, price,
distance) Distance coefficient is negative and significant.
Business travel Positive relationship between business travel and
telecommunications advances
Evidence - continued Co-authorship in Economics
Rising tendency over time Increases number of long-distance co-authorships,
but also local co-authorships. Cities and telephones
Japanese data shows: Minutes per household = f(income, urban status) Positive and significant coefficient on urban status (ie.,
increases telephone interactions) U.S.:
Expenditures/capita rise with city size. Historically: telephone use rises with urbanization
Conclusions Growth in telecommunications has
not diminished need for face-to-face.
Innovations in telecommunications are likely complementary, not substitutes.
What does the future hold?
Look at another article by Glaeser: “Are Cities Dying?”Journal of Economic
Perspectives, Vol. 12(2), Spring 1998, pp. 139 - 160.
Focuses on role of “agglomerating” vs. “congesting” forces and discusses which are likely to dominate
Presented by: Joe
Dorian Friedman – U.S. News and World Report article Suggests that Downtown regions are
experiencing some type of renaissance. Sparked by downtown construction of
entertainment facilities Inmigration of empty-nesters Growth of cultural attractions
Is this consistent with other perspectives? What type of agglomeration is emphasized
here? Do you think this is happening?
The Economist Article Focuses on the revitalization of Chicago’s
State Street “Transit mall” experiment scrapped Through-traffic re-introduced Role of demographics
Empty-nesters (young and old) Attraction of retailers (more later in
semester) Role of TIF districts
Some controversy Conclusion
Role of Comparative Advantage
We now understand why cities exist Internal Scale Economies External Economies or Agglomeration
Effects Can be Localization and/or Urbanization
Now we turn to models of where cities evolve Will consider both the locational choices of
people and firms. Two sides of labor market as well as retirees.
Comparative Advantage and Location of Cities Look at cost-minimizing behavior
of firms in context of model where friction of space is introduced.
Comparative Advantage: A firm can produce a product at lower
opportunity cost than firms in other regions.
Explains why regions specialize.
There are Two Types of Firms
Transfer Orientation Geographic differences in
transport costs are more important than geographic differences in other costs.
Cost of transportation of raw materials vis a vis finished product is driving force.
Examples include steel, autos, beer.
Local Input Cost Orientation
Geographic differences in other inputs (labor, land, capital, energy, amenities) more important than transport costs.
Pull of non-transport factors is driving force.
Examples include textiles, computers, R&D
Transfer-Oriented Production Firms
Start with very simple assumptions and later relax them.
Assume firm produces single output, sold at single point (market=M) and uses raw materials from single source (Forest=F).
Only one input needs to be transported. All others are ubiquitous.
There is a comparative advantage for the input at F, and it is not available elsewhere.
Assumptions - continued
Firm does not substitute among inputs (fixed proportions).
Firm is small in relation to input and output markets.
Transport costs are constant/mile at t.
There is single mode of transport.
Two types of costs
Procurement costs These are costs associated with procuring the
inputs from the forest to the plant. PC=wi*ti*(x) wi*ti=monetary weight
Distribution costs These are costs associated with distributing the
final product from the plant to the market PC=wo*to*(xm-x) wo*to*=monetary weight
Question: What determines the optimal
location
Compare the monetary weights of the inputs and
the output.
Market Orientation (aka-weight gaining process)Total Transport Costs Total
Transport Costs
F M
Costmin.
wwii*t*tii <w <woo*t*too
Materials Orientation (aka-weight losing process)Total Transport Costs Total
Transport Costs
F M
Costmin.
wwii*t*tii >w >woo*t*too
Adding realism
Terminal costs are costs associated with loading and unloading These increase if you locate at
intermediate locations. Nonconstant values for ti and to.
we expect t falls with distance shipped. Look at implications for our model
Transport Costs function of distance
Total Transport Costs Total Transport Costs
F M
Total Transport CostsCostmin.
Allow multiple markets
Assume inputs are all ubiquitous. Keep simple assumptions of constant transport
costs. If transportation costs are important, then firms
will choose Median location Assume each input weighs 1 lb. and transport
costs per mile are $2.00. Monetary weight per customer=wo*to=1*2=2
Assume markets are 1 mile apart.
Principle of Median Location:Distribution of Customers and Monetary Weight
Customers: 8 9 11 13 2 1 23 10 7 3MW=wo*to: 16 18 22 26 4 2 46 20 14 6
Sum of MW: $86 $86
Miles frommidpoint: 5 4 3 2 1 0 1 2 3 4
Total Costs:80 + 72 + 66 + 52 + 4 + 0 + 46 + 40 + 42 + 24= $426
Middle Point
43 customers 43 customers
Proof by Contradiction
Customers: 8 9 11 13 2 1 23 10 7 3MW=wo*to: 16 18 22 26 4 2 46 20 14 6
Sum of MW: $88 $40
Miles frommidpoint: 6 5 4 3 2 1 0 1 2 3
Total Costs:96 + 90 + 88 + 78 + 8 + 2 + 0 + 20 + 28 + 18= $428
Alternative Point
44 customers 20 customers
Other Input Cost Orientations
Other types of costs may matter more to firms. These include: Labor Orientation
Amenity Orientation Energy Orientation Land Orientation External Economy Orientation Fiscal Orientation
Graphical depiction
Suppose that one location has lower labor costs than another. e.g., South has more right to work laws, and
lower unionization rates. We can adapt our most simple model. Look at balancing of labor and transport
costs. Assume one kind of transport costs. Assume labor costs decline with distance.
Labor Oriented Firm
Transport+Labor Costs Transport+Labor Costs
M Low cost Labor
Costmin.
DistributionCosts
Labor Costs
MinimumLabor Costs
Two types of Orientations
What have we observed over time? Transport costs have continually declined. Reasons:
Lighter materials More efficient transport modes
Container systems on ships Deregulation of trucking Development of interstate highway system
Internationalization of markets generating other input cost differentials.