Urban and Regional Economics

ECON 246

Prof. Clark

Week #1

My Specifics

• Office: DS412• Office phone: 288-3339• Office hours: Tu, Th: 3:30-5:30, by appointment.

– Open Door Policy

• e-mail: david.clark@marquette.edu– I encourage you to make use of this!

• Web site: http://classwork.busadm.mu.edu/classwork/clark

Textbooks and Readings

• O’Sullivan textbook – Undergraduate level– I expect you to read this, and we will cover

some material in class. You will be responsible for much of this on your own.

• Readings– Wassmer book– Other readings from journals

Class Overview• Class is divided into three sections

– Regional economic issues• Where economic activity locates in a large region

(employment and population).• Systems of cities and urban hierarchy• Urban and regional growth models

– Urban location models• Where urban activity locates within cities (employment and

population)

– Urban problems• Poverty, housing, and transportation

Examinations• Exams

– Two non-cumulative take-home mid-terms– Cumulative in-class final– Worth 25% each

• Exams will be challenging. • Tentative dates for distribution/collection of

exams given in syllabus.– Adjustments may need to be made.

Papers• There is a term paper in this class.

– Empirical papers encouraged.

• Meeting date: • Proposal due on Thursday, 10/3 at beginning of class.

(3% of course grade) – Note error in syllabus– Late penalty of 5% per day

• Final draft due Thursday 11/21 at beginning of class. (17% of course grade)– Late penalty of 5% per day– Guidelines on web page. Read these carefully!

Any verified plagiarism dealt with in a most severe fashion.

Costs very high!

Students have been expelled from school for these types of infractions.

Class presentations and preparation

• Each student is responsible for several in-class presentations.

• You must read the article carefully, and then present it in class.– Presentation lasts 10-15 minutes.– We will discuss the findings and I will ask questions.– Goals: Enhance presentation skills and generate discussion

• I also expect preparation and participation– I expect each of you to read the articles in advance. I will

ask each of you specific questions re: article.

• Collectively worth 5% of course grade

Final course grade:

• Calculation of weighted course averageExam 1 * 0.25 +

Exam 2 * 0.25 +

Exam 3 * 0.25 +

Paper proposal * 0.03 +

Final paper * 0.17 +

Presentation/preparation grade * 0.05

---------------------------------------------

= FINAL AVERAGE

• Plug average into Conversion Table below.

Course Grade

• Letter Grade Percentage Grade

A: 95-100%

AB: 90-94

B: 80-89

BC: 75-79

C: 70-74

D: 60-69

F: <60

What you earn is what you get!

• No options for extra credit. This is not fair to your colleagues.

• Also, you don’t typically get second chances in the real world.

Urban and Regional Economics

What are these?

Name some urban problems.

How do we evaluate these in urban course?

Traditional Economic Theory Ignores Frictions of Space

• How is this introduced?– Consumer behavior?– Producer behavior?

• Economists aren’t the only ones to evaluate frictions of space.

– How do we differ?

How does Regional Economics differ from Urban Economics?

• Primary difference is in the geographic scale of the space being examined.

– Urban economics focuses on small geographic areas such as neighborhoods, towns and cities.

– Regional economics focuses on larger geographic areas such as partial or whole states, or larger regions.

What is a city to an economist?

• A city is simply a population density or employment density blip in a distance continuum.

• Think of this in 3-dimensions (p. 70 – Wassmer)

Density

Distance

BaselineDensity

City Density

Alternative Definitions of Cities• Urban Place (aka Municipality or MCD)

– Incorporated town, borough or city with pop.>=2500.– Based on arbitrary jurisdictional lines.– This is political city.

• Is it necessarily an economic city?

• Urbanized Area– 1 or 2 central cities with pop>=50,000 plus the surrounding

settled areas w/ pop. density>1k/acre.– Includes parts of counties.– Problem for economists?

Metropolitan Areas (MA’s)• Metropolitan areas

– Central city with at least 50k persons plus its county, plus surrounding counties so long as they are integrated with the central city.

– Integration determined by the amount of commuting between county and the nucleus.

– Counties are the building blocks, and hence there is a lot of data.

• Standalone MA’s called MSA’s• Weakness of definition?

Consolidated MA’s• These are MA’s that have grown together.• The component MA’s are known as PMSA’s

(primary metropolitan statistical areas)– Two PMSA’s in Milwaukee

• There are approximately 20 of these.– Largest is NY CMSA which contains parts of CT, NY, NJ

and PA, and has about 18 million people.

• Metropolitan definitions are designated by the Census, and they are updated about every 5 years.

Sub-metro areas

• Every 10 years the Census does a population census and examines the detailed spatial distribution of the population.

• Within cities, geographic areas called census tracts, and smaller census blocks are defined.

• Advantage: Very detailed.

• Disadvantage: Only once a decade.

Lets look at some pictures generated using a simple GIS package.

• Software combines mapping software with data.

– Look at Census data

Noncredit Assignment Form 3 groups of 2-3 people:

Group I: Identify data sources at MSA level Group II: Identify data at the sub-MSA level

(specifically central city/suburban ring) Group III: Identify data at the census tract/block

group.

Look at Internet and Library for Overview

Give 1-2 page report (9 copies of each) identifying the following:

• Data categories (e.g., housing, household income, labor market).

• Frequency in which data is published (periodicity).

• Geographic scope of data.

• Complete data source and where it can be found.

• Give 5 minute overview to class next time.

Why do cities exist?

• Some cite historical accident.

• Economic perspective:– Economic agents (households, firms,

government agencies) have found it advantageous to congregate in a spatially concentrated manner.

• There are economic forces at work. – Lets get a little more precise.

Three Commonly Cited Reasons for the Existence of Cities

• Comparative Advantage– Cost savings associated with unequal distribution of

resources and hence differences in opportunity costs of production.

• Internal Economies of Scale– Cost savings associated with increased firm size.

• External Economies of Scale– Cost savings associated with increased industry or city

size.

Comparative Advantage

• We learn about this in International Trade• When different countries have different resource

allocations, we can determine flows of trade by examining comparative advantage.

• Think of examples for cities.– What is Milwaukee’s comparative advantage?

• Note:– Not actually a reason for the existence of cities.– Where cities locate, not why they locate

Internal Scale Economies

• Internal to production function.– Look at homogeneous production function

• nQ=f(nK,nL,nD)– if then there are increasing returns to scale.

– if then there are constant returns to scale.

– if then there are decreasing returns to scale.

• Here we are talking about getting bigger in a spatially concentrated manner.

Sources of Internal Scale Economies

• Higher K/D and L/D ratio implies less movement of materials and thus lower per unit costs.

• May be able to take advantage of greater specialization.– e.g., in-house computer technician may not be viable

until you reach a certain size.

• These are absolutely necessary. Why?• In several weeks, we will come back to this topic

when we look at Central Place Theory.

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

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

These are Agglomeration Economies

Urbanization or Localization?

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.

Empirical Evidence on Agglomeration Economics

• MSAE emphasizes empirical tools.

• 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.

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.

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?

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• Look at Role of 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

Reasons for Decentralization

• Automobile has lead to suburbanization of population and employment.

• Blight-flight process has reinforced this process.– More later in semester.

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 does the Future Hold?

• Telecommunication innovations

• Should these strengthen or weaken pull towards cities?

• Are these substitutes or complements?– Can we completely substitute away from face-

to-face communication?