L3: Ch. 4: Urban Development

Question 1

Why do economic activities cluster into cities?

Answer 1

Proximity reduces: costs of transporting inputs, outputs, and people

Proximity increases: Efficiency in production (economies of scale)

Question 2

What is an “Economic City”?

Answer 2

A spatial cluster of economic activity where land is used intensively

Question 3

Why will population density be higher near job sites?

Answer 3

Workers prefer to live close to their jobs. -> Demand for residential land around job sites will rise -> Increase in prices.

Where land prices are high workers purchase smaller lots = increased density. They will choose to use the land intensively and consume more of other goods.

Question 4

What does Agglomeration Economies/ External Economies of Scale refer to?

Answer 4

The benefits that firms gain from clustering close together.

Question 5

Why is the shape production function increasing and concave?

Answer 5

The reflects the assumption that productivity of labour declines over time.

Question 6

For the production function Q=G(S)F(L), what do G(S) and F(L) represent?

Answer 6

G(S) = Shift factor reflecting the presence of economies of scale where S is measure of the size of the cluster in which the firm operates.

F(L) = represents the production depending on the amount of labour

Question 7

What are the two types of Agglomeration Economies?

Answer 7

Urbanization Economy: The benefits of agglomeration related to city size.

Localization Economy: The benefits of agglomeration related to the size of a firm’s industry at a particular location.

Question 8

What are the costs of agglomeration?

Answer 8

• Traffic congestion
• Increased gov and admin costs
• Increased land and labour costs (reflecting higher costs of living in a large city)
• Indirect costs: pollution, social ills (poverty, drugs, crime)

Question 9

What are the conditions for the optimal city size?

Answer 9

When marginal benefits = marginal costs of concentration.

This maximizes the utility of a typical resident

Question 10

What is the wage equation with urbanized economies?

Answer 10

w(N) = p x G(N) x MPL

N - measure of total population in the city

Question 11

What is the utility function equation?

Answer 11

v(N) =w(N) - c(N)

v(N) - utility
w(N) - wages
c(N) - Cost of living

Question 12

Are rapidly increasing economies of scale associated with smaller or larger optimal city sizes?

What about rapidly increasing costs of living?

Answer 12

Larger: this shifts the wage function up

Smaller: this shift the costs of living function up

Question 13

What is the Hinterland?

Answer 13

The area outside the metropolitan area, often agricultural land

Question 14

What is migration motivated by?

Answer 14

It is motivated by differences in utility available in different areas.

Question 15

What are the conditions for the equilibrium city size? Why?

Answer 15

v(N**) = v(0)

Migration will continue and the city will grow until the utility is equal to the utility available in the hinterland. This causes the city to grow beyond it’s optimal city size.

Question 16

What policies can attempt to correct the over migration city size problem?

Answer 16

i) Raise the v(0) - utility level of the hinterland: ex. gov incentives for agriculture and rural land ownership
ii) Create more cities: so that even with unrestricted migration all cities will be closer to their optimum city sizes - multiple nodes within a larger metropolitan area

Question 17

What does the importance of localized economies indicate for city planning?

Answer 17

This indicates that cities should specialize in a few basic industries that complement each other

Question 18

Why should cities specialize in a few industries that benefit from each other?

Answer 18

This is because each additional firm increases city size and therefore cost of living. If the firms to not benefit each other then they do not increase labour productivity or wages.

Question 19

What factors may determine a city’s basic industries?

Answer 19

Natural resources, location advantages, accidents of histories

Question 20

How do developers correct city size inefficiencies? (according the J. Henderson)

Answer 20

People should be willing to pay up to v(N) - v(o) . Developers should be able to capture some of this discrepancy between optimum and hinterland utility if they are able to create a new city at v(N)