Abstract One of the most robust empirical facts about cities is that, on average, workers earn more in large cities than in small ones, a fact that has been coined the “urban wage premium.” This chapter provides an overview of why labor productivity increases with the number of workers. The various reasons explaining the urban wage premium are called agglomeration economies, whose intensity depends on the decisions made by firms and workers to operate in proximity. The cornucopia of numerous effects associated with density are organized into the following trilogy: sharing, matching, and learning. By the same token, we pin down the reasons on the production side that tell us why cities exist. Afterwards, we will see that competition for land across workers endowed with different skills, hence different incomes, may explain why highly skilled workers gather within the more productive, but more expensive, cities.
Abstract Chapter 14 examines the origin, impact, and solution of local and global pollution on cities. The direct health impacts of local pollution are illustrated empirically. More compact cities may decrease the emission of global pollutants (CO2) but may also increase the density of local pollution. Local pollution can also be addressed by relocation of firms, as this changes the polluting commuting flows. But city governments can also opt for more direct environmental policies that reduce the volume of car use and make cars greener. Low emission zones are a popular policy and are more effective than vehicle plate-type restrictions. Global pollutants affect the Earth’s climate for centuries to come, though their impacts vary across locations. As a global climate policy is difficult to enforce, emission reductions will rely on cleaner equipment innovations and on climate change adaptation by migration and relocation of production.
Abstract Ever since the emergence of a knowledge economy, the concentration of human capital and high-value activities in large cities is a marked feature of developed and emerging economies. This chapter focuses primarily on the sorting of heterogeneous workers across space and aims to explain why cities differ in their skill composition and overall productivity. We show why and how heterogeneous cities inhabited by workers having different skills emerge as the equilibrium outcome in a setting where workers are free to choose where to live and work. Why a few cities fare better than other similar cities depends on their social capital. Social capital may explain how different spillovers may arise from the decisions made by individuals who choose to exchange at a cost, or not to exchange information within the city they live in. We examine empirical evidence regarding learning in large cities by exploring the dynamics of urban premiums.
Abstract This chapter argues that the price of agricultural land at a given location reflects the amount of a specific attribute available at that location. Such attributes include fertility (Ricardo) and the proximity to the market town (von Thünen). The common thread is that the price of land can be determined as an auction involving landlords and farmers. Nowadays, von Thünen’s model keeps its relevance when the market town is replaced by a large plant, using farmers’ outputs. The aggregate agricultural land rent was approximately 7 times the British GDP in 1700 and 4 times in 1810. Since then, the role of the agricultural sector kept decreasing across the globe.
Abstract In 2019 total built-up land (villages, towns, cities, and human infrastructure) varies, according to the definition of what urban land is, from 1% to 3% of the world’s habitable land. Thus, there seems to be a vast oversupply of land. Yet, in 2002 the value of residential land in the U.S. was twice its GDP. So, what determines the urban land rent? As will be seen throughout this chapter, the answer is unambiguous: the land rent capitalizes the scarcity of land at a given location with respect to attributes that are locally provided. Examples of such attributes include proximity to the workplace as well as to specific sites that provide amenities, e.g., schools, the sea or a lake, shopping areas, and leisure facilities. The sorting of heterogeneous workers within cities also explains why spatial segregation is a stable outcome.
Abstract In this chapter, we discuss the origin and scope of retailing. Because big cities host populations that display more variation in tastes and incomes, they can sustain a larger number of firms selling a great variety of products. A shopping street is a cluster of physical stores. The main reason for a shopping street to emerge is the possibility of making one-stop and multipurpose trips. The clustering of stores selling different goods creates a demand externality: because they travel only once to the shopping street, households save on shopping and search costs. This demand externality incentivizes stores to cluster. In many cities, the entry of malls has led to the exit of conventional retailers and even to the complete disappearance of town centers. We examine the conditions under which a shopping street can withstand competition from, or be overtaken by, a shopping mall situated on the city’s outskirts.
Abstract The aim of spatial economics is to explain (i) why people and economic activities are agglomerated in a few places and regions; (ii) why some places and regions fare better than others; and (iii) whether there is a causal relationship between the two. The common research strategy in the economic modeling of human settlements is to assume that some activities are characterized by scale economies and others by scale diseconomies, the economic landscape being the balancing point between these two forces. Spatial economics has two distinguishing features that make it different from other economic fields: area and distance. Each of them is associated with a specific economic good, i.e., land with area and transportation with distance. On average, households spend more than one-third of their income on housing and transportation.
Abstract This chapter examines the impact of place-based policies on the spatial distribution of economic activity, focusing on three categories: regional development policies, urban renewal initiatives, and land use regulations. While economists often view such interventions with skepticism, market failures may provide an efficiency-based rationale for their implementation. The claim that place-based policies effectively reduce spatial inequalities is less persuasive. However, we present evidence that location-based subsidies have increased earnings for disadvantaged workers in targeted areas of the U.S. At a more localized scale, we explore housing externalities and urban renewal policies, including the Krachtwijken program in the Netherlands and subsidized housing construction in the U.S., demonstrating that these interventions are likely to be fully capitalized into land rents.
Abstract This chapter explores the impact of land use regulations on cities using a two-location model, highlighting three key effects: the supply effect, the financial burden of the regulations (the internal effect) and the value enhancing (the external) effect. While each plays a significant role, determining which effect dominates remains an empirical question. The chapter empirically illustrates these effects using studies from the United States, India, and the United Kingdom, showing how land use restrictions influence housing markets, spatial inequalities, and welfare outcomes. Overall, the empirical findings suggest that internal and supply effects are often large and negative, while external benefits depend strongly on context and may be insufficient to offset overall welfare losses.
Abstract This chapter studies focuses on the location of firms when the interregional distribution of people is given. We study how the interaction between the size of regional markets, and the accessibility to these markets shapes the distribution of firms. Being in a large region enhances firms’ profits because it allows them to save on transportation costs while lowering their average production cost through a bigger output. Nevertheless, as firms set up in a large market, competition is intensified. Consequently, the interregional distribution of firms is governed by two forces that pull in opposite directions: the agglomeration force generated by firms’ desire for market access, and the dispersion force generated by firms’ desire to avoid market crowding. The main result is the home-market effect: the large region attracts a more than proportionate share of firms. We also show that agglomeration economies can lead to the formation of asymmetric clusters of firms even in an initially symmetric environment.
Abstract In this chapter, we allow both firms and labor to move across regions. The mobility of capital and the mobility of labor do not obey the same rules. The movement of capital to a region brings its production capability, but the returns to capital do not have to be spent in the same region. By contrast, workers bring with them both their production and consumption capacities. We provide a full analytical solution to Krugman’s core-periphery model, which predicts that if decreases in trade or transportation costs are sufficiently strong, the economy moves from a spatially uniform distribution of activities to a core-periphery structure in which mobile activities are agglomerated in one region, while the other region retains only immobile activities. Unfortunately, the result is not robust when workers are heterogeneous in their attitude toward migration or when agglomeration generates higher urban costs.
Abstract Over the last decade, quantitative models have gained prominence in spatial economics. Spatial quantitative economics stresses the importance of linkages across locations through gravity equations that show how a particular location is more affected by nearby locations than by distant places. By applying a simple quantitative setting to a very simple geography, we show how consumers with heterogeneous preferences, amenities, increasing returns, and commuting costs interact to give rise to contrasted spatial patterns. The existence of multiple equilibria is not rare. We illustrate the working of quantitative models through two applications. The first one studies how labor supply in a system of regions is affected by a demand shock through workers’ spatial behavior who can choose to live and work in the same region or to commute between regions. The second one focuses on the impact of a large urban public works program on employment in Addis Ababa, Ethiopia.
Abstract This chapter studies the spatial nature of interregional trade. Regions are not endowed with the same comparative advantages, and regional specialization may also be the outcome of activities displaying increasing returns. One of the most robust empirical facts in economics is the Gravity Law that links bilateral trade flows to countries’ GDPs and the distance between them. Rather than the death of distance, data on trade flows spanning 1910 to 2014 suggest that distance has become considerably more important over the last century. Conditions for no trade, one-way, and two-way trade to arise under perfect and monopolistic competition are derived. The literature treats the transportation sector as a black box through a given transportation rate. This assumption is not innocuous because competition among carriers interacts with competition among firms that produce the load.
Abstract The availability of local public goods is a major feature of cities because the congregation of a large population facilitates the mutual provision of public services that could not be obtained in isolation. Many public services are supplied by facilities established at specific locations. Distance is a major barrier to the use of public services. Choosing the number and locations of public facilities is, therefore, governed by the trade-off between increasing returns and travel costs. In other words, the provision of most local public goods is therefore a spatial problem. Urban sprawl and the decentralization of jobs have given rise to metropolitan areas that include many political jurisdictions providing local public goods to their residents and competing in tax levels to attract jobs and residents. We will use the tools of spatial economics to study the spatial organization of a metropolitan area, which typically has several employment centers.
Abstract Cities have very different sizes and form an urban system that is hierarchical in nature. In this chapter, we study the basic frameworks that aim to explain this urban hierarchy. We study the formation of cities where workers are free to choose where to live and work. Self-organization leads to cities that do not maximize the well-being of its inhabitants. When land developers or local government can choose the size of cities, the market outcome involves the existence of specialized cities having different sizes. Workers maximize their welfare but this does not lead to workers having the same income across cities. In addition, diversified and specialized cities coexist in most countries. Specifically, large cities tend to be diversified while specialized cities are smaller and have similar sizes. We then discuss the main reasons for diversified cities to exist. Cities are also differentiated by their amenity endowments that typically capitalize in land prices.
Abstract The chapter addresses the causes and possible solutions to address urban congestion. Cities could only grow to their current size once commuting costs have decreased dramatically, that is, when walking has been replaced by trains, trams, and cars. But most cities have reached a point where the congestion levels due to car use and public transport use have become a major handicap and a major source of efficiency losses. The efficiency of different congestion pricing as well as infrastructure extensions are assessed. As commuting costs downtown are one of the major drivers of location and land rents, any change in accessibility will affect the choice of residence and impact on the welfare of different income groups.
Do spatial spillovers matter for the dynamics of livestock production in Russian regions? Are spatial effects significant for individual growth determinants? To address these questions, the study uses panel data for 77 regions spanning 2001–2022 and estimates several spatial econometric models: a spatial lag of X model (SLX), a spatial autoregressive model (SAR), a spatial Durbin model (SDM), and a spatial autoregressive model with error autocorrelation (SAC). Three distance matrices are employed to capture spatial relationships among regions: a road-distance matrix, a rail-distance matrix, and a straight-line distance matrix between regional administrative centers. The results indicate that the spatial autoregressive coefficient and the error autocorrelation coefficient are statistically insignificant. The spatial lags of demand, supply, and infrastructure factors also prove insignificant. This implies that spatial spillovers do not influence livestock production dynamics, and the sector’s development in Russian regions is largely autonomous. The key growth drivers are the inertia of the previous period and consumer demand, while supply-side factors and transport infrastructure exert no statistically significant impact
