22.04.2009 | Fachgebiet Internationale Wirtschaft | Prof. Dr. Volker Nitsch | Nicolai Wendland
Urban Economics SOSE 2009
Urban Economics
22.04.2009 | Fachgebiet Internationale Wirtschaft | Prof. Dr. Volker Nitsch | Nicolai Wendland
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
SOSE 2009
Urban Economics
22.04.2009 | Fachgebiet Internationale Wirtschaft | Prof. Dr. Volker Nitsch | Nicolai Wendland
Office Hours:
Prof. Dr. Volker Nitsch [email protected]
Wednesday 17:00 – 18:00; S3/13 138 Please make an appointment
Nicolai Wendland [email protected]
Wednesday 12:00 – 13:00 ; S3/13 136 Please make an appointment
SOSE 2009
What is Urban Economics?
22.04.2009 | Fachgebiet Internationale Wirtschaft | Prof. Dr. Volker Nitsch | Nicolai Wendland
“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.
What is Urban Economics?
22.04.2009 | Fachgebiet Internationale Wirtschaft | Prof. Dr. Volker Nitsch | Nicolai Wendland
• 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
What is Urban Economics?
22.04.2009 | Fachgebiet Internationale Wirtschaft | Prof. Dr. Volker Nitsch | Nicolai Wendland
• Urban Economics studies land use and land prices
as a function of its location.
It provides a solid understanding of the economics of cities (and regions) and how market forces shape them.
• It is also linked to Urban Planning, Urban Sociology, and Urban
Politics.
What is Urban Economics?
22.04.2009 | Fachgebiet Internationale Wirtschaft | Prof. Dr. Volker Nitsch | Nicolai Wendland
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)?
What is Urban Economics?
22.04.2009 | Fachgebiet Internationale Wirtschaft | Prof. Dr. Volker Nitsch | Nicolai Wendland
Why is Toronto “single peaked”….
What is Urban Economics?
22.04.2009 | Fachgebiet Internationale Wirtschaft | Prof. Dr. Volker Nitsch | Nicolai Wendland
… and Barcelona “flat”?
What is Urban Economics?
22.04.2009 | Fachgebiet Internationale Wirtschaft | Prof. Dr. Volker Nitsch | Nicolai Wendland
Why do skyscrapers cluster in Manhattan…
What is Urban Economics?
22.04.2009 | Fachgebiet Internationale Wirtschaft | Prof. Dr. Volker Nitsch | Nicolai Wendland
… and why do middle-class families sprawl in the suburbs of Las Vegas
but live in inner-city apartment buildings in Zurich?
What can you expect from this course?
22.04.2009 | Fachgebiet Internationale Wirtschaft | Prof. Dr. Volker Nitsch | Nicolai Wendland
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?
Course outline
22.04.2009 | Fachgebiet Internationale Wirtschaft | Prof. Dr. Volker Nitsch | Nicolai Wendland
Basic Textbooks
• Arthur O´Sullivan: 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
Course outline
22.04.2009 | Fachgebiet Internationale Wirtschaft | Prof. Dr. Volker Nitsch | Nicolai Wendland
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
Why study cities?
22.04.2009 | Fachgebiet Internationale Wirtschaft | Prof. Dr. Volker Nitsch | Nicolai Wendland
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.
2007
—
50,0
100,0
2007
2025
2050
Why study cities?
22.04.2009 | Fachgebiet Internationale Wirtschaft | Prof. Dr. Volker Nitsch | Nicolai Wendland
Cities are big... Rank City Country Population Remark
1 Tōkyō Japan 33,800,000 incl. Yokohama, Kawasaki, Saitama
2 Seoul Korea (South) 23,900,000 incl. Bucheon, Goyang, Incheon, Seongnam, Suweon
3 Ciudad de México Mexico 22,900,000 incl. Nezahualcóyotl, 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 São 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
Why study cities?
22.04.2009 | Fachgebiet Internationale Wirtschaft | Prof. Dr. Volker Nitsch | Nicolai Wendland
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
Why study cities?
22.04.2009 | Fachgebiet Internationale Wirtschaft | Prof. Dr. Volker Nitsch | Nicolai Wendland
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
Why study cities?
22.04.2009 | Fachgebiet Internationale Wirtschaft | Prof. Dr. Volker Nitsch | Nicolai Wendland
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.
Why study cities?
22.04.2009 | Fachgebiet Internationale Wirtschaft | Prof. Dr. Volker Nitsch | Nicolai Wendland
Cities define areas, countries, continents...
Why study cities?
22.04.2009 | Fachgebiet Internationale Wirtschaft | Prof. Dr. Volker Nitsch | Nicolai Wendland
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.
Why study cities?
22.04.2009 | Fachgebiet Internationale Wirtschaft | Prof. Dr. Volker Nitsch | Nicolai Wendland
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.
Axioms of Urban Economics
22.04.2009 | Fachgebiet Internationale Wirtschaft | Prof. Dr. Volker Nitsch | Nicolai Wendland
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
Axioms of Urban Economics
22.04.2009 | Fachgebiet Internationale Wirtschaft | Prof. Dr. Volker Nitsch | Nicolai Wendland
Axiom 2: Self-Reinforcing Effects Generate Extreme Outcomes
2) Example: retail trade or auto row attracts comparison shoppers.
3) Creative clusters attract other artists or creatives.
1) Self-Reinforcing effects lead to changes in the same direction.
Axioms of Urban Economics
22.04.2009 | Fachgebiet Internationale Wirtschaft | Prof. Dr. Volker Nitsch | Nicolai Wendland
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.
Axioms of Urban Economics
22.04.2009 | Fachgebiet Internationale Wirtschaft | Prof. Dr. Volker Nitsch | Nicolai Wendland
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
Axioms of Urban Economics
22.04.2009 | Fachgebiet Internationale Wirtschaft | Prof. Dr. Volker Nitsch | Nicolai Wendland
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.