Why do cities exist

Question 1

Technological spillovers

Answer 1

• innovation and creativity:
  
  • personal communication fosters knowledge spillovers
  • cities produce more patents (e.g . Silicon Valley)
• Learning and acquisition of human capital:
  
  • knowledge spillover intra and inter industry
  • opportunities to learn via social network
  • city workers are more productive

Question 2

What are the pecuniary externalities from a city existing?

Answer 2

• trade and production:
  
  • gathering places for buyers and sellers
  • centres of production
• industrial clustering:
  
  • low probability of unemployment and labour shortage
  • increasing returns from transportation costs e.g. shipping in bulk

Question 3

Consumer city

Answer 3

• centres of consumption:
  
  • urban density facilitates consumption
• high amenity cities have grown faster than low amenity cities
• urban rent growth > urban wage growth

Question 4

Equal productivity (no incentive to have a city)

Answer 4

• no benefit from specialisation
• individuals can produce both goods with the same productivity

Question 5

Constant returns to scale (no incentive to have a city)

Answer 5

• No need to produce in factory
• homemade will be sufficient
• exchange has costs without any benefits

Question 6

Trading cities

Answer 6

Cities where outputs are traded through intra and inter region

Question 7

When do trading cities emerge?

Answer 7

• when comparative advantage (specialisation & trade, offsets transportation costs) is combined with scale economies in transport (large trucks), exchange and production (efficient workers)

Question 8

When do cities trade?

Answer 8

Trade criteria based on opportunity cost
- If exchange rate is greater than the opportunity cost of production

Question 9

3 conditions of sustainable factory city

Answer 9

• Salary is high enough:
  
  • cover higher cost of living
  • spatial equilibrium (city vs rural):
    
    • if factory product price > labour cost + input cost: migration from rural
    • if factory product price < labour cost + input cost: back to rural
• Scale economies:
  
  • Factory productivity is higher than homemade productivity
• Transportation cost:
  
  • close enough to make total buying cost lower than homemade cost

Question 10

Agglomeration economies (pecuniary)

Answer 10

pecuniary:
- firms:
- large pool of specialised labourers => lower wages, cheap training costs
- competition between service providers => cheap business services
- proximity to customers/suppliers => cheap shipping cost
- worker:
- more job opportunities => lower search cost
- proximity to other firms in the same industry => cheap relocation cost

Question 11

Agglomeration economies (technological spillovers)

Answer 11

technological perspective:
- firms:
- knowledge spillover within and across industry => more innovative
- facilitate skill matching between firms and workers
- worker:
- knowledge spillover within and across industry => accumulate human capital
- easy to obtain job information => less information asymmetry between firms and workers

Question 12

Agglomeration economies (summary)

Answer 12

larger cities provide more benefits to firms and workers than smaller cities (lower cost, more productive, wider variety of goods)