MIC ECON Lec 12 – Urban Economics



LEARNING OBJECTIVE The purpose of this topic is to explain why cities start, grow, spread to the suburbs and decay. The beginning and growth of cities are shown to stem from various economies of agglomeration. The role of the automobile is shown to be crucial in urban sprawl. It is also the source of major urban transportation problems. Pollution problems are also explored.

AGGLOMERATION ECONOMIES Economies of agglomeration are various savings in cost and additional profit opportunities which attract firms and population to cities. These forces include: internal economies of scale, locational economies from savings in transportation, external economies of scale, and savings stemming from the presence of a well provided infrastructure.

 Why do 75% of the people live in urban areas? Why do almost all the businesses locate in or near cities? The answer is that there are strong economic forces which attract them to centers of employment and revenues.

LOCATIONAL ECONOMIES Locational economies stem from the savings in handling costs. These accrue if the production is located at a transshipment point, such as near a dock or rail terminal. Locational economies explain the birth and growth of all major cities in the United States.

 Take all major cities of the United States (N.Y., L.A., Chicago), they are all located at transshipment points. The transshipment may be from land to water transportation, or it may be from one form of land transportation to another (e.g. Denver).

INFRASTRUCTURE Infrastructure refers to all the public and private services and facilities needed for the conduct of an economic activity. This includes, for instance, roads, police protection, mail delivery, but also banking, educational, and health facilities.

 A city like Chicago provides many services and institutions not available in smaller towns. For instance, it is the home of several exchanges which allow trading in commodities produced in the Midwest states.

AGGLOMERATION DEMAND Firms find it highly beneficial to locate near each other in order to be able to serve a larger number of clients. This agglomeration demand is especially important in specialized industries.

 Shopping malls are modern versions of markets. Retail stores owners prefer to be located in the shopping malls, in spite of the competitors, simply because the customer are there. And the customers go there because they find a greater variety of choice.

DEGLOMERATION FORCE Many elements contribute to deglomeration forces, making urban locations unattractive: – high costs (e.g. rent, services, taxes), – congestion (for transportation in particular), – externalities (e.g. pollution and noise), and – crime.

 Many cities have suffered as their downtown inner cities emptied of inhabitants and businesses and became menacing areas after hours. Cleveland, Detroit and Buffalo come to mind. These cities are now trying to revitalize these areas.

URBAN SPRAWL The migration of businesses and population to the suburbs is referred to as urban sprawl. A major contributing factor for urban sprawl (in addition to deglomeration forces) is the construction of highways. Space and amenities have also been inducements for moving. In general suburbs are highly protective and fragmented.

 On Long Island, the Long Island Expressway spurred development of communities, as it provided dwellers with commuting and businesses with an easy access to their mid-atlantic markets.

URBAN DECAY Deterioration of central city neighborhoods follows a pattern of lower services and relatively high real estate taxes, division of rental property, rental to lower income groups, abandonment of buildings by landlords, and continuing spiral of same.

 The South Bronx has been publicized as a rundown area which several administrations (Federal, State and City) have vowed to to revitalize, but the spiral of urban decay has so far overwhelmed these promises.

URBAN TRANSPORTATION PROBLEM Traffic congestion and deteriorating public transportation are most apparent aspects of the urban transportation problem. The movement of population and businesses to the suburbs is the major contributing factor. Indeed, blue collar jobs are unfilled in the suburbs, but the potential employees live in the cities. The public transportation was built to bring employees into the cities. Automobile traffic needs to be restricted with tolls or peak traffic charges.

Traffic congestion in Los Angeles has become legendary. The city has spread so much that the use of a car is almost unavoidable. Now, extreme measures are necessary, such as the banning of all truck traffic during rush hours.

URBAN POLLUTION Increasing pollution is tied to population density, high incomes, mass production and lack of incentives to prevent it. Policies to remedy the problem include setting (EPA) standards, assessing taxes or penalties, giving tax credit or subsidies, and establishing a market for pollution fees or rights.

As urban areas have expanded, places where garbage can be dumped without someone living nearby, have disappeared. The difficulties of dumping garbage have been dramatized in 1989 by the barge from New Jersey which went around half the world, only to return to its origin. The United States has started a concerted effort in recycling in the 1990’s.



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