12 - Economics of Cities, Regulation, and Local Public Finance Flashcards
What are the five economic forces that shape city size?
They include economies of scale, economies of scope, economies of density, network efficiencies, and agglomeration economies.
Why are these economic forces important for cities?
They help explain how cities lower production costs, share resources, enhance product variety, benefit from widespread network effects, and generate positive spillovers through clustering—all of which drive urban growth and productivity.
What are economies of scale?
They occur when the average cost of production falls as the volume of output increases—producing 1,000 pies, for example, is more cost-efficient than producing just 10.
How do economies of scale influence location decisions?
Large-scale production can lower costs enough to offset transportation expenses, which explains why industries like auto assembly or repair shops tend to concentrate in fewer locations rather than being spread across many small cities.
What are economies of density?
They arise when producers share resources (inputs), lowering costs for all involved.
Can you provide examples of economies of density?
Examples include universities sharing libraries and research facilities, sports teams sharing stadiums, and public infrastructure like utilities and transportation systems serving multiple entities.
Define economies of scope.
Economies of scope occur when producing a variety of related products together reduces the average cost of production compared to producing them separately.
How do economies of scope benefit businesses?
They allow businesses to share resources across different products—for instance, a bakery making both pies and cookies can use the same equipment more efficiently than if it specialized in only one product.
What are network efficiencies (or network externalities)?
They occur when a product or service becomes more valuable as more people use it, enhancing its overall utility.
Give examples of network efficiencies.
Examples include social networks (like LinkedIn), local telephone services, and even languages—each becoming more useful as adoption increases.
What are agglomeration economies?
They are the benefits arising from firms and industries clustering together, which leads to shared resources, knowledge spillovers, and higher overall productivity than if firms operated in isolation.
Why do agglomeration economies attract firms to clusters?
Clusters create a “new” resource—access to specialized labor, ideas, and innovation—that improves productivity and makes the area more attractive for additional firms and investment.
What are some well-known examples of economic clusters?
Examples include Detroit (“Motor City”) for the auto industry, NYC (“Wall Street”) for finance, Northern California (“Silicon Valley”) for technology, and Southern California (“Hollywood”) for entertainment.
How do clusters relate to agglomeration economies?
Clusters are physical concentrations of interconnected businesses that benefit from agglomeration economies, leveraging shared resources and expertise to drive growth.
What economic factors influence the shape of cities?
Proximity to resources, transportation costs, and the benefits of agglomeration all play key roles in determining urban form.
Why is the scarcity of ideally located land significant?
Because ideally located land is limited—only about 6% of U.S. land is developed—making it a critical and scarce resource that shapes how and where cities expand.
In a unidimensional location model with a uniform population, where should a single business locate?
The business should locate at the median point, ensuring that half of the customers lie on each side, thus minimizing overall travel distances.
How do two competing businesses choose their locations in this model?
When two businesses compete, they tend to position themselves symmetrically around the median to capture the largest share of customers while minimizing transportation costs.
What complications arise if the population is non-uniform in a unidimensional location model?
If people are not evenly distributed, the optimal location shifts toward areas with a higher concentration of potential customers, and businesses may adjust their placement to better serve these clusters.
How might urban transportation networks affect the predictions of a unidimensional location model?
Efficient transportation networks can reduce effective distances, altering optimal locations by making it easier for customers to travel, thereby influencing business clustering and city shape.
What factors continue to shape the form of cities in the 21st century?
Proximity to resources, transportation costs, and the limited supply of ideally located land remain fundamental, just as they did in ancient urban development.
Why is only a small percentage of U.S. land developed significant?
With only about 6% of U.S. land developed, the scarcity of well-located land drives intense competition and significantly influences urban planning and economic activity.
According to Furman, what are some problems associated with land use restrictions?
Land use restrictions can impede economic growth by limiting agglomeration economies, reducing labor mobility, and contributing to volatile housing price bubbles, all of which lower living standards.
How do land use restrictions affect economic productivity?
They prevent people from relocating to areas with greater agglomeration benefits, which reduces overall productivity and diminishes employer-employee match quality.
What potential social problems can land use restrictions exacerbate?
They can act as barriers to entry for lower-income individuals, leading to increased income and wealth inequality and restricting access to high-opportunity urban centers.
What economic barriers do land use restrictions create?
They limit affordable housing and restrict entry to productive urban centers, making it harder for lower-income individuals to access economic opportunities.
How do these restrictions affect the provision of public goods?
Lower density resulting from restrictive land use makes it more costly to provide public goods and services, potentially reducing overall public provision.
What social issues arise from restrictive land use policies?
They can lead to exclusionary practices where only the socioeconomically advantaged can access high-opportunity areas, deepening social and income inequality.
How do land use restrictions impact housing affordability?
They drive up housing costs by limiting supply, thereby preventing a diverse range of residents from living in economically vibrant urban centers.
What environmental consequences can result from land use restrictions that promote urban sprawl?
They can lead to longer commutes, increased fossil fuel consumption, encroachment on natural ecosystems, and adverse public health impacts from extended travel distances.
How do longer commutes impact both the environment and human health?
Extended travel increases pollution and resource consumption while also raising risks for accidents, stress, and chronic health issues like high blood pressure.
What challenges do land use regulations pose despite their necessity?
They often lack objective cost–benefit analysis, favor incumbent property owners, and create unintended distortions that can hinder economic efficiency and growth.
Why might land use regulations be seen as a double-edged sword?
While they address externalities and protect community standards, they can also restrict growth, reduce mobility, and exacerbate market volatility when not implemented based on objective criteria.
How do most property taxes work?
Most property taxes are ad valorem—levied in proportion to the market or assessed value of a property after accounting for any exemptions, such as homestead exemptions for primary residences.
What role does the tax assessor play in property taxation?
The tax assessor appraises properties to determine their assessed value, which is then used to calculate the ad valorem tax owed based on an effective tax rate.
What is the effective tax rate in the context of property taxes?
It is the ratio of the tax owed to the market value of the property, reflecting the proportionate burden of the tax.
What are property tax distortions?
They are unintended effects of property tax policies that can discourage property improvements or development by penalizing increases in market value, thereby distorting economic decisions.
How might market-value-based property taxes discourage development?
Since improvements increase a property’s assessed value and tax liability, property owners may be disincentivized from investing in upgrades or development.
How do sales taxes create distortions in consumer behavior?
Sales taxes increase the purchase cost of goods, potentially reducing demand and altering consumption patterns, which can lead to market inefficiencies.
In what way do sales tax distortions differ from property tax distortions?
While sales taxes affect consumption at the point of purchase, property taxes influence long-term investment decisions by altering the cost structure of owning and improving property.
What challenges arise from infrequent property sales when assessing market value?
Infrequent sales make it difficult to determine up-to-date market values, often leading to disputes over assessed values and potential distortions in tax burdens.
How do restrictions like California’s Prop 13 affect property tax dynamics?
Such restrictions limit how much property taxes can increase, which can reduce incentives for property improvements and create barriers to selling by protecting incumbent residents.
What are some alternative methods for raising local tax revenue aside from traditional property taxes?
Alternatives include taxes based on house size (e.g., bricks, windows), user fees (e.g., gas taxes, tolls), local sales taxes, vacancy taxes, non-resident taxes, transaction taxes (like land transfer taxes), and land value taxes.
What is a key advantage of using a land value tax (LVT)?
A land value tax focuses solely on the value of the land and does not tax improvements, reducing distortions and encouraging efficient land use and development.
How is a land value tax defined?
It is a tax levied only on the value of the land, excluding any structures or improvements, thereby encouraging development by not penalizing property enhancements.
Why do many economists advocate for land value taxes?
Because LVTs are less distortionary than taxes based on market value, they promote the most efficient use of land and discourage speculation that leads to vacant properties.
How can property taxes be effectively disguised, as seen in some jurisdictions like Hong Kong?
In places like Hong Kong, explicit property taxes are low or absent; instead, revenue is generated through restrictive land sale policies and government ownership of undeveloped land, which act as de facto taxes.
What economic inefficiencies result from artificially restricting land sales?
Such restrictions create quotas that distort market dynamics, inflate real estate prices, and lead to inefficient land use despite low stated tax rates.
What is the central challenge in public finance?
The main challenge is generating revenue for public goods, services, and infrastructure in a way that minimizes economic distortions and inefficiencies.
What does the phrase “There is no such thing as a free lunch” imply in public finance?
It means that funding public goods always comes with trade-offs; revenue must be raised in ways that ideally disturb economic decisions as little as possible.
How do commonly used public finance methods fall short of the ideal?
Many traditional tax methods create distortions in behavior and investment, similar to land use restrictions, highlighting the need for innovative approaches to reduce inefficiencies in revenue generation.
