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Urban Economics

SOSE 2009

22.04.2009 | Fachgebiet Internationale Wirtschaft | Prof. Dr. Volker Nitsch | Nicolai Wendland
Urban Economics
SOSE 2009

The course will be part of VWL-B (together with the


course: Unternehmen in einer globalisierten Umwelt)

There will be a 90-minute final exam

22.04.2009 | Fachgebiet Internationale Wirtschaft | Prof. Dr. Volker Nitsch | Nicolai Wendland
Urban Economics
SOSE 2009

Office Hours:

Prof. Dr. Volker Nitsch


vnitsch@wiwiss.fu-berlin.de

Wednesday 17:00 18:00; S3/13 138


Please make an appointment

Nicolai Wendland
wendland@vwl.tu-darmstadt.de

Wednesday 12:00 13:00 ; S3/13 136


Please make an appointment

22.04.2009 | Fachgebiet Internationale Wirtschaft | Prof. Dr. Volker Nitsch | Nicolai Wendland
What is Urban Economics?

Urban Economics puts economics and geography together,


exploring the geographical or location choices of utility maximizing
households and profit maximizing firms. Urban economics also
identifies inefficiencies in location choices and examines alternative
public policies to promote efficient choices.

O Sullivan (2009), p.1.

22.04.2009 | Fachgebiet Internationale Wirtschaft | Prof. Dr. Volker Nitsch | Nicolai Wendland
What is Urban Economics?

Urban (and Regional) Economics adds geographical space to economic


analysis .

It recognizes that goods are produced and traded at certain locations.


They are bought by individuals, who live at one and work at another
location. Distance between economic activities implies costs for moving
people and goods. It also affects communication and interaction among
economic agents.

A main focus is land. Land is immobile and associated with a unique


location

22.04.2009 | Fachgebiet Internationale Wirtschaft | Prof. Dr. Volker Nitsch | Nicolai Wendland
What is Urban Economics?

Urban Economics studies land use and land prices


as a function of its location.

It is also linked to Urban Planning, Urban Sociology, and Urban


Politics.

It provides a solid understanding of the economics of cities


(and regions)
and how market forces shape them.

22.04.2009 | Fachgebiet Internationale Wirtschaft | Prof. Dr. Volker Nitsch | Nicolai Wendland
What is Urban Economics?

Questions we try to understand:

Why is the mean rent in Zurich (18.62 /m2) three times higher than
it is in Berlin (5.75 /m2) ?

Why are housing prices in Ann Arbor (median house price $ 250,000)
three times higher than in Detroit ($ 90,000)?

22.04.2009 | Fachgebiet Internationale Wirtschaft | Prof. Dr. Volker Nitsch | Nicolai Wendland
What is Urban Economics?

Why is Toronto single peaked.

22.04.2009 | Fachgebiet Internationale Wirtschaft | Prof. Dr. Volker Nitsch | Nicolai Wendland
What is Urban Economics?

and Barcelona flat?

22.04.2009 | Fachgebiet Internationale Wirtschaft | Prof. Dr. Volker Nitsch | Nicolai Wendland
What is Urban Economics?

Why do skyscrapers cluster in Manhattan

22.04.2009 | Fachgebiet Internationale Wirtschaft | Prof. Dr. Volker Nitsch | Nicolai Wendland
What is Urban Economics?

and why do middle-class families sprawl in the suburbs of Las Vegas


but live in inner-city apartment buildings in Zurich?

22.04.2009 | Fachgebiet Internationale Wirtschaft | Prof. Dr. Volker Nitsch | Nicolai Wendland
What can you expect from this course?

A. Location Economics: Why do people live where they do? Why do


businesses locate where they do?

B. Land and Real Estate Values: Why are some land values
astronomical? How do land markets work? What is their role in
making the urban economy function?

C. Cities: Why and where do they emerge? How are they


distributed across space? How important is history?

D. Transportation: One of the driving forces of an economy.


What are the real costs of commuting to work and who
pays them? How does congestion cause economic
inefficiencies?

22.04.2009 | Fachgebiet Internationale Wirtschaft | Prof. Dr. Volker Nitsch | Nicolai Wendland
Course outline

Basic Textbooks

Arthur OSullivan: Urban economics (6th or 7th ed.)

John F. Mc Donald and Daniel P. McMillen: Urban Economics and


Real Estate

Richard J Arnott and Daniel P.McMillen (eds.): A Companion to


Urban Economics

22.04.2009 | Fachgebiet Internationale Wirtschaft | Prof. Dr. Volker Nitsch | Nicolai Wendland
Course outline

PART I
Why do cities exist? Why do firms cluster?
City Size
Urban Growth

PART II
The Basic Urban Model and Extensions
The Monocentric City
Land Rent and Urban Land Use Patterns
The Demise of the Monocentric City /Multicentric and Edge Cities

PART III
Public Transport and Traffic Congestion
Land Use Control and Zoning

22.04.2009 | Fachgebiet Internationale Wirtschaft | Prof. Dr. Volker Nitsch | Nicolai Wendland
Why study cities?

Cities are important...

By the end of the year 2007, for the first time in the history of
mankind, there were as many people living in cities (urban areas) as
there were in rural areas.

Projections predict an urbanization rate of 57.2% by the year 2025


and of about 70% by 2050.
100,0

50,0


2007

2007
2025
2050

22.04.2009 | Fachgebiet Internationale Wirtschaft | Prof. Dr. Volker Nitsch | Nicolai Wendland
Why study cities?

Cities are big...


Rank City Country Population Remark

1 Tky Japan 33,800,000 incl. Yokohama, Kawasaki, Saitama


incl. Bucheon, Goyang, Incheon, Seongnam,
2 Seoul Korea (South) 23,900,000 Suweon

3 Ciudad de Mxico Mexico 22,900,000 incl. Nezahualcyotl, Ecatepec, Naucalpan

4 Delhi India 22,400,000 incl. Faridabad, Ghaziabad

5 Mumbai India 22,300,000 incl. Bhiwandi, Kalyan, Thane, Ulhasnagar

6 New York United States of America 21,900,000 incl. Newark, Paterson

7 So Paulo Brazil 21,000,000 incl. Guarulhos

8 Manila Philippines 19,200,000 incl. Kalookan, Quezon City

9 Los Angeles United States of America 18,000,000 incl. Riverside, Anaheim

10 Shanghai China 17,900,000

source: http://www.citypopulation.de, March 2009

22.04.2009 | Fachgebiet Internationale Wirtschaft | Prof. Dr. Volker Nitsch | Nicolai Wendland
Why study cities?

Cities are the centers of economic activity...

Example: The 3 core areas in Japan (Tokyo, Osaka, Nagoya) cover

5.2% of the total area of Japan but

33% of its population


40% of its GDP
31% of its manufacturing employment

22.04.2009 | Fachgebiet Internationale Wirtschaft | Prof. Dr. Volker Nitsch | Nicolai Wendland
Why study cities?

Cities create proximity ...

Ciccone and Hall (AER, 1996) and Ciccone (EER, 2002) explore the
relation between employment density and productivity:
They find an elasticity of about 5% (US), and 4.5% (Europe)
respectively.

Doubling the density increases productivity by 5% (4.5%).

Rosenthal and Strange (REStat, 2003) show that for certain industries,
distance is of major importance.

Biggest effects within 1 mile


Importance declines with distance
Employment of different industries is less important

22.04.2009 | Fachgebiet Internationale Wirtschaft | Prof. Dr. Volker Nitsch | Nicolai Wendland
Why study cities?

Cities are centers of creativity and innovation...

They create environments and amenities, which attract workers with


distinctive preferences (see Florida, R. (2002): The Rise of the Creative
Class).

Most innovative activity takes place within cities and metropolitan


regions. Feldmann and Audretsch (EER, 1999) collected a dataset of
3969 US innovations (patents) in 1982.

96% of the innovations originated in metropolitan areas.

Probably the most famous place of innovation is the Silicon Valley area,
where a considerable cluster of software development firms emerged.

22.04.2009 | Fachgebiet Internationale Wirtschaft | Prof. Dr. Volker Nitsch | Nicolai Wendland
Why study cities?

Cities define areas, countries, continents...

22.04.2009 | Fachgebiet Internationale Wirtschaft | Prof. Dr. Volker Nitsch | Nicolai Wendland
Why study cities?

Political and functional boundaries define urban areas

The political city is defined by administrative boundaries.

The functional city (or area) is defined by a relatively high population


and employment density and contains a variety of closely related
activities.

We (Urban Economists) are mainly interested in the functional city.

22.04.2009 | Fachgebiet Internationale Wirtschaft | Prof. Dr. Volker Nitsch | Nicolai Wendland
Why study cities?

Boundaries may be arbitrary

Area Metro Pop City Pop Ratio


Berlin 4.17 Mio 3.39 Mio 81%
Boston 4.39 Mio 0.59 Mio 13%
Barcelona 4.40 Mio 1.58 Mio 36%
Bern 0.35 Mio 0.13 mio 37%

There are differences between political and functional boundaries.

22.04.2009 | Fachgebiet Internationale Wirtschaft | Prof. Dr. Volker Nitsch | Nicolai Wendland
Axioms of Urban Economics

An Axiom is a self-evident truth...

Axiom 1: Prices Adjust to Achieve Locational Equilibrium

1) A Locational Equilibrium creates a situation in which no agent has an


incentive to move.
2) In equilibrium, location advantages are capitalized in land values /rents (or
wages).
rent beachhouse > rent highwayhouse

rent in center > rent on city fringe

22.04.2009 | Fachgebiet Internationale Wirtschaft | Prof. Dr. Volker Nitsch | Nicolai Wendland
Axioms of Urban Economics

Axiom 2: Self-Reinforcing Effects Generate Extreme Outcomes

1) Self-Reinforcing effects lead to changes in the same direction.

2) Example: retail trade or auto row attracts comparison shoppers.

3) Creative clusters attract other artists or creatives.

22.04.2009 | Fachgebiet Internationale Wirtschaft | Prof. Dr. Volker Nitsch | Nicolai Wendland
Axioms of Urban Economics

Axiom 3: Externalities Cause Inefficiency

An externality is a cost or benefit of a transaction by someone other


than the buyer or seller.

External cost: Pollution due to heavy industry.

External benefit: Renovating a house may increase the value of


adjacent property.

22.04.2009 | Fachgebiet Internationale Wirtschaft | Prof. Dr. Volker Nitsch | Nicolai Wendland
Axioms of Urban Economics

Axiom 4: Production is Subject to Economies of Scale

Economies of scale occur when the average cost of production


decreases as the output increases.

They occur for two reasons:

1) Indivisible Goods: Machines or other inputs required to produce


one single unit or a thousand.

2) Factor Specialization:
Specialized worker is master of one task
Continuity
Repeating and learning

22.04.2009 | Fachgebiet Internationale Wirtschaft | Prof. Dr. Volker Nitsch | Nicolai Wendland
Axioms of Urban Economics

Axiom 5: Competition Generates Zero Profit

1) Competitors enter the market until economic profits equal zero.

2) Economic costs include all opportunity costs of time and funds.

3) Zero profit: Firms are making just enough money to stay in business
but not enough to attract more entrants.

22.04.2009 | Fachgebiet Internationale Wirtschaft | Prof. Dr. Volker Nitsch | Nicolai Wendland