Chapter 4 City Size Why do cities differ in size and scope? - PowerPoint Presentation

Slide1

Chapter 4

City SizeSlide2

Why do cities differ in size and scope?

In this Chapter we explore the economic forces responsible for the development of cities with different sizes.Slide3
Slide4

Determinants of City Size

The following factors will determine the size of a city:Localization or urbanization economies

Congesting factorsMigration from neighboring citiesCreation of local employmentPolitical economy considerations (democracy vs. dictatorship)Slide5

Benefits and Costs of Big Cities

Larger cities benefit from agglomeration economies reflected in higher wages.However, large cities have several undesirable features, e.g. congestion, longer commuting times and pollution.Slide6

Utility of a Typical Worker

Wages increase with city size

Labor income assuming 8hrs work day

Commuting cost increases with workforce at an increasing rate

Utility = Labor income -commuting costSlide7

Moving from a city of 1m to 2m increases utility of a typical worker. The agglomeration economies are stronger than the diseconomies from commuting.

Moving from a city of 2m to 4m decreases utility of a typical worker. The agglomeration economies are weaker than the diseconomies from commuting.

This implies there is an optimal city size, the size at which utility per worker is maximizedSlide8

A Side on

Locational Equilibrium

Locations closer to the city center are more desirable as they result in lower transportation costsLocational equilibrium implies that the price of residential land will adjust to make workers indifferent among all locationsSlide9

Rental Price Adjusts

Rent adjusts so that

the total commute cost and

rent is the same for all locations

Utility =D+E-B-C

Workers own land, each receives rental income equals to the average rent paid

For example, in a city of 2m workers where the worker is paid $80, the price of land adjusts to achieve locational equilibrium. Slide10

A System of Cities

Consider a region of 6 million workersHow will the region’s workforce be distributed among cities?

What is the equilibrium number of cities? Is this equilibrium stable?We start by considering different possibilities

Six cities, each with 1 million workers

Three cities, each with 2 million workers

Two cities, each with 3 million workersSlide11

Lets consider a situation where there are six cities each with a population of 1m worker

Is this an equilibrium outcome? Is this outcome stable?

Six cities

A

E

C

D

F

BSlide12

Six cities: A to F

Point S is

an equilibrium

At point S, the utility per worker is equal across the six cities.

No worker has an incentive to migrate to a different citySlide13

Six cities: A to F

Point S is not a stable outcome

However, the migration of a group of workers will not give us back the same equilibrium. Any

point on the upward sloping part of the utility curve is not a stable equilibriumSlide14

Cities Are Not Too Small

Self-reinforcing change: more workers have an incentive to migrate

Extreme outcome: city A disappears

Lesson: Positively sloped portion of utility curve generates unstable equilibrium

A

E

C

D

F

B

Migration from A to D generates higher utility in D

Similarly for B and CSlide15

Two large cities

Point L is a

stable equilibrium

Migration is self correcting. Any point on the downward sloping part of the utility curve is a stable equilibriumSlide16

Cities May Be Too Large

Start with 2-city outcomeMigration generates higher utility in the shrinking city

Migration is self-correcting: migrants regret the move and returnLesson: Negatively sloped portion of utility curve generates stable equilibriumSlide17

Questions for Discussion

What is the optimal city size?

Is

it a stable

equilibrium?

Is

it a

unique equilibrium?

What

are the implications

for policy making?

According to this model, what causes a city to grow?Slide18

Role of Agglomeration Economies in Determining City Size

Differences in city size can be explained partly by the extent of agglomeration economies.Slide19

Extent of Agglomeration Economies

The extent of localization economies differs across cities. Consider cost saving from knowledge spillovers

The cluster exists, because the co-location of firms cut the expenses of identifying, accessing and transferring knowledge. Some studies have emphasized how firms will cut the costs of interacting if located in a cluster characterized by trust and other features of social capital (

Maskell

, 2000) that help reduce malfeasance, induce reliable information to be volunteered, cause agreements to be honored, enable employees to share tacit information, and place negotiators on the same wave-length. Slide20

Extent of Agglomeration Economies

However for other industries, trust-levels are insignificant, like, for instance, in Silicon Valley where “nobody knows anybody else’s mother”, and where no deep history or complex familial ties exist (Cohen and Fields, 1999: 2).

Finally, the extent of knowledge spillovers varies by industry type and age and by geographic region, and is influenced by structural and institutional factors, by culture [social or business] and by public policySlide21

A system of different cities

Equilibrium in cities with differences in agglomeration economies:

workers

Utility/worker

S: small localization

M: large localization

B: large urbanization

There are 10 m workers.

What

is the equilibrium size of each city?

Utility must be equal across cities

Each city has to be on the negatively sloped side of the utility curve

1

3

6Slide22

Role of Local Goods in determining City Size

Local goods are those consumed locally within a citySome local goods are available only in large cities, e.g. opera or Peruvian restaurants.

That is because demand in small cities is not large enough to make it profitable for sellers to produce them Slide23

Local Goods and City Size

When producing local goods for which economies of scale exit, sellers are more likely to locate in larger cities, creating new employment opportunities.Thus, Larger cities will create more employment opportunities than smaller ones.

Self Reinforcing effect: Larger cities are more likely to grow than smaller ones.Slide24

Large Primary Cities

In many developing countries, the central city tends to be very large as it has a relatively large population share

Metropolitan Area

Share of National population

New York metropolitan area

6.5 %

Tokyo

15.8%

Buenos Aires

35.5%

Mexico City

21%

Montevideo, Uruguay

39.4%Slide25

Puzzle of large primary cities

In many developing countries a disproportionate share of investment in telecommunication and roads occurs around the capital city (

Why?)Ades and Glaeser (1995) suggest that nations run by dictators have larger primary cities.

The dictator transfers resources to the primary city to satisfy the people who are most likely to overthrow him

This creates incentives for the rural dwellers to migrate to the city which gets even larger