McGraw-Hill/Irwin ©2009 The McGraw-Hill Companies, All Rights Reserved

Chapter 1

Introduction and Axioms of Urban Economics

©2009 The McGraw-Hill Companies, All Rights Reserved 1-2

•Economics: profit-max and utility-max choices

•Geography: location and the spatial distribution of activity

•Urban economics

•Profit-max and Utility-max location choices

•Consequences of location choices

Urban Economics: Economics meets geography

©2009 The McGraw-Hill Companies, All Rights Reserved 1-3

•Why do cities exist?

•Why do competing firms cluster?

•Why do cities vary in size?

•What causes urban growth and decline?

•Who benefits from urban growth?

Part 1: Market forces in the development of cities

©2009 The McGraw-Hill Companies, All Rights Reserved 1-4

•Why does the price of land vary within cities?

•Why do people and firms build up instead of out?

•Why are there dozens of municipalities in the typical metro area?

•What are the consequences of race and income segregation?

•What are the effects of land-use controls and zoning?

Part 2: Land use within cities

©2009 The McGraw-Hill Companies, All Rights Reserved 1-5

•What is the marginal external cost of automobile travel?

•Why do so few people take mass transit?

Part 3: Urban transportation

©2009 The McGraw-Hill Companies, All Rights Reserved 1-6

•Are criminals rational?

•What is the optimum level of crime?

•How effective is education in reducing crime?

•Why are crime rates higher in large cities?

•Why did crime rates drop in the 1990s?

Part 4: Crime and public policy

©2009 The McGraw-Hill Companies, All Rights Reserved 1-7

Part 5: Housing and Public Policy

•Why is housing different from other goods?

•How do changes in one housing submarket (e.g., high-income housing) affect other submarkets (middle-income housing)?

•What is the bang per buck of public housing?

•What are the tradeoffs from housing allowances (cash)?

•How much tax revenue is lost because of the mortgage subsidy?

©2009 The McGraw-Hill Companies, All Rights Reserved 1-8

Part 6: Local Government

•What is the rationale for our fragmented system of local government?

•Does majority rule generate efficient choices?

•Who bears the cost of the property tax?

•How do local governments respond to intergovernmental grants?

©2009 The McGraw-Hill Companies, All Rights Reserved 1-9

•Place with a relatively high population density

•Census definitions

•Urban area: minimum population = 2,500

•Urban population: people living in urban areas

•Metropolitan area: at least 50k people

•Micropolitan area: 10k to 50k people

•Principal city: largest municipality in metro area

What is a City?

©2009 The McGraw-Hill Companies, All Rights Reserved 1-10

•Conditions for cities

•Agricultural surplus

•Urban production to exchange for food

•Transportation system for exchange

•Facts on cities: Figure 1-1, 1-2, 1-3; Tables 1-1, 1-2

Why Do Cities Exist?

©2009 The McGraw-Hill Companies, All Rights Reserved 1-11

©2009 The McGraw-Hill Companies, All Rights Reserved 1-12

©2009 The McGraw-Hill Companies, All Rights Reserved 1-13

©2009 The McGraw-Hill Companies, All Rights Reserved 1-14

©2009 The McGraw-Hill Companies, All Rights Reserved 1-15

©2009 The McGraw-Hill Companies, All Rights Reserved 1-16

•Locational equilibrium: No incentive to move

•Examples of prices behind locational equilibrium

•Rent on beach house > Rent on highway house

•Wage in Coolsville < Wage in Dullsville

•Land rent in center > Land rent on fringe

Axiom 1: Prices Adjust to Achieve Locational Equilibrium

©2009 The McGraw-Hill Companies, All Rights Reserved 1-17

•Self-reinforcing effect: leads to changes in same direction

•Auto row attracts comparison shoppers

•Cluster of artists attracts other artists

Axiom 2: Self-Reinforcing Effects Generate Extreme Outcomes

©2009 The McGraw-Hill Companies, All Rights Reserved 1-18

•Externality: cost or benefit of a transaction experienced by someone else

•External cost: burning gasoline affects breathers

•External benefit: painting a peeling house increases property values

Axiom 3: Externalities Cause Inefficiency

©2009 The McGraw-Hill Companies, All Rights Reserved 1-19

•Economies of scale: Average cost decreases as quantity increases

• Indivisible inputs: Required to produce one or a thousand units

•Factor specialization: Benefits from continuity and repetition

•Extent of scale economies varies across activities

Axiom 4: Production is Subject to Economies of Scale

©2009 The McGraw-Hill Companies, All Rights Reserved 1-20

•Entry into market continues until economic profit is zero

•Economic cost includes explicit cost and opportunity cost of time and funds

•Firms earn just enough to stay in business, but not enough to attract entrants

Axiom 5: Competition Generates Zero Economic Profit