Transcript ECON 246 - Meeting #1

Urban and Regional Economics
ECON 246
Prof. Clark
Week #1
My Specifics
• Office: DS412
• Office phone: 288-3339
• Office hours: Tu, Th: 3:30-5:30, by appointment.
– Open Door Policy
• e-mail: [email protected]
– I encourage you to make use of this!
• Web site:
http://classwork.busadm.mu.edu/classwork/clark
Textbooks and Readings
• O’Sullivan textbook
– Undergraduate level
– I expect you to read this, and we will cover
some material in class. You will be responsible
for much of this on your own.
• Readings
– Wassmer book
– Other readings from journals
Class Overview
• Class is divided into three sections
– Regional economic issues
• Where economic activity locates in a large region
(employment and population).
• Systems of cities and urban hierarchy
• Urban and regional growth models
– Urban location models
• Where urban activity locates within cities (employment and
population)
– Urban problems
• Poverty, housing, and transportation
Examinations
• Exams
– Two non-cumulative take-home mid-terms
– Cumulative in-class final
– Worth 25% each
• Exams will be challenging.
• Tentative dates for distribution/collection of
exams given in syllabus.
– Adjustments may need to be made.
Papers
• There is a term paper in this class.
– Empirical papers encouraged.
• Meeting date:
• Proposal due on Thursday, 10/3 at beginning of
class. (3% of course grade)
– Note error in syllabus
– Late penalty of 5% per day
• Final draft due Thursday 11/21 at beginning of
class. (17% of course grade)
– Late penalty of 5% per day
– Guidelines on web page. Read these carefully!
Any verified plagiarism dealt
with in a most severe fashion.
Costs very high!
Students have been
expelled from school for
these types of
infractions.
Class presentations and
preparation
• Each student is responsible for several in-class
presentations.
• You must read the article carefully, and then
present it in class.
– Presentation lasts 10-15 minutes.
– We will discuss the findings and I will ask questions.
– Goals: Enhance presentation skills and generate
discussion
• I also expect preparation and participation
– I expect each of you to read the articles in advance. I
will ask each of you specific questions re: article.
• Collectively worth 5% of course grade
Final course grade:
• Calculation of weighted course average
Exam 1 * 0.25 +
Exam 2 * 0.25 +
Exam 3 * 0.25 +
Paper proposal * 0.03 +
Final paper * 0.17 +
Presentation/preparation grade * 0.05
--------------------------------------------= FINAL AVERAGE
• Plug average into Conversion Table below.
Course Grade
• Letter Grade
A:
AB:
B:
BC:
C:
D:
F:
Percentage Grade
95-100%
90-94
80-89
75-79
70-74
60-69
<60
What you earn is what you get!
• No options for extra
credit. This is not fair
to your colleagues.
• Also, you don’t
typically get second
chances in the real
world.
Urban and Regional Economics
What are these?
Name some urban
problems.
How do we evaluate
these in urban course?
Traditional Economic Theory
Ignores Frictions of Space
• How is this introduced?
– Consumer behavior?
– Producer behavior?
• Economists aren’t the
only ones to evaluate
frictions of space.
– How do we differ?
How does Regional Economics
differ from Urban Economics?
• Primary difference is in the geographic
scale of the space being examined.
– Urban economics focuses on small geographic
areas such as neighborhoods, towns and cities.
– Regional economics focuses on larger
geographic areas such as partial or whole states,
or larger regions.
What is a city to an economist?
• A city is simply a population density or
employment density blip in a distance continuum.
• Think of this in 3-dimensions (p. 70 – Wassmer)
Density
City Density
Baseline
Density
Distance
Alternative Definitions of Cities
• Urban Place (aka Municipality or MCD)
– Incorporated town, borough or city with
pop.>=2500.
– Based on arbitrary jurisdictional lines.
– This is political city.
• Is it necessarily an economic city?
• Urbanized Area
– 1 or 2 central cities with pop>=50,000 plus the
surrounding settled areas w/ pop. density>1k/acre.
– Includes parts of counties.
– Problem for economists?
Metropolitan Areas (MA’s)
• Metropolitan areas
– Central city with at least 50k persons plus its
county, plus surrounding counties so long as
they are integrated with the central city.
– Integration determined by the amount of
commuting between county and the nucleus.
– Counties are the building blocks, and hence
there is a lot of data.
• Standalone MA’s called MSA’s
• Weakness of definition?
Consolidated MA’s
• These are MA’s that have grown together.
• The component MA’s are known as PMSA’s
(primary metropolitan statistical areas)
– Two PMSA’s in Milwaukee
• There are approximately 20 of these.
– Largest is NY CMSA which contains parts of
CT, NY, NJ and PA, and has about 18 million
people.
• Metropolitan definitions are designated by
the Census, and they are updated about every
5 years.
Sub-metro areas
• Every 10 years the Census does a
population census and examines the detailed
spatial distribution of the population.
• Within cities, geographic areas called
census tracts, and smaller census blocks are
defined.
• Advantage: Very detailed.
• Disadvantage: Only once a decade.
Lets look at some pictures generated
using a simple GIS package.
• Software combines
mapping software
with data.
– Look at Census data
Noncredit Assignment

Form 3 groups of 2-3 people:




Group I: Identify data sources at MSA level
Group II: Identify data at the sub-MSA level
(specifically central city/suburban ring)
Group III: Identify data at the census tract/block
group.
Look at Internet and Library for Overview
Give 1-2 page report (9 copies of
each) identifying the following:
• Data categories (e.g., housing, household
income, labor market).
• Frequency in which data is published
(periodicity).
• Geographic scope of data.
• Complete data source and where it can be
found.
• Give 5 minute overview to class next time.
Why do cities exist?
• Some cite historical accident.
• Economic perspective:
– Economic agents (households, firms,
government agencies) have found it
advantageous to congregate in a spatially
concentrated manner.
• There are economic forces at work.
– Lets get a little more precise.
Three Commonly Cited Reasons
for the Existence of Cities
• Comparative Advantage
– Cost savings associated with unequal distribution of
resources and hence differences in opportunity costs of
production.
• Internal Economies of Scale
– Cost savings associated with increased firm size.
• External Economies of Scale
– Cost savings associated with increased industry or city
size.
Comparative Advantage
• We learn about this in International Trade
• When different countries have different resource
allocations, we can determine flows of trade by
examining comparative advantage.
• Think of examples for cities.
– What is Milwaukee’s comparative advantage?
• Note:
– Not actually a reason for the existence of cities.
– Where cities locate, not why they locate
Internal Scale Economies
• Internal to production function.
– Look at homogeneous production function
• ndQ=f(nK,nL,nD)
– if d>1 then there are increasing returns to scale.
– if d=1 then there are constant returns to scale.
– if d<1 then there are decreasing returns to scale.
• Here we are talking about getting bigger in
a spatially concentrated manner.
Sources of Internal Scale
Economies
• Higher K/D and L/D ratio implies less movement
of materials and thus lower per unit costs.
• May be able to take advantage of greater
specialization.
– e.g., in-house computer technician may not be viable
until you reach a certain size.
• These are absolutely necessary. Why?
• In several weeks, we will come back to this topic
when we look at Central Place Theory.
Agglomeration Economies

Externality in production.


What is this?
Q=G(N)*f(K,L)
N=indicator of city size or industry size
• Note that the agglomeration effect, G(N) is
external to the firms’ production function,
f(K,L,D)
• Economies of Agglomeration: MG/MN>0
• Diseconomies of Agglomeration:
Agglomeration Economies and
Diseconomies
Cost
(time)
IR to external
economies
DR to external
economies
N
Urbanization Economies
• N is size of city
• Cost savings from being in larger city.
– Better business services (greater variety).
– Economies of scale in input supply for all industries.
– Local labor market efficiencies
• Complementarity (e.g., secondary labor market)
– Economies from interaction - Jacobs argument
• Inter-industry knowledge spillovers
• How do we know these are eventually exhausted?
Localization Economies
• N is size of industry in which firm is operating.
• This is clustering of firms in an industry
– e.g., Silicon Valley, Detroit, etc.
• Sources
– Firm specific business savings due to scale economies
in intermediate inputs.
– Unique labor markets
– Knowledge spillovers (intra-industry)
• Can lead to Incubation process
– Valuable initially, later erodes
Article by Ray Vernon
• Vernon looks at NYC in the late 1950’s and
looks at a number of its disadvantages:
–
–
–
–
No natural resource advantage
high relative wages
costly commuting expenses
declining importance of port
• Yet certain types of companies continue to
locate there.
• Why?
Common Characteristics
• Establishments with low overhead.
– Why?
– Look at Tables 1 and 2
• They face an uncertain future
– Survival requires ability to adapt quickly.
• They continue to rely upon face-to-face
contact
– Why not other forms of communication?
Look at some of his examples
• Small dressmaking shops
– Rapidly changing environment.
– Need to meet with specialists from other firms
frequently.
• Military electronics
– Products are unique and change rapidly.
• Printing
– Unique jobs
• Publishing
– Use of specialists
These are Agglomeration
Economies
Urbanization or
Localization?
Parallels to Corporate HQ’s
• Many firms have their corporate
headquarters in NYC.
– 156 of Fortune 500 in 1958.
• They face uncertain future.
• Corporations need to make use of banking,
economic, financial, legal, accounting
specialists.
• Advantage of being near Wall Street.
• Need to be able to respond quickly.
Why firms leave?
• Advantages can erode.
– Example of insurance companies.
• As technologies mature, some activities are
get exported to lower cost production areas.
– Radio example.
• As industry grows, pull to lower cost
regions grows.
Empirical Evidence on
Agglomeration Economics
• MSAE emphasizes empirical tools.
• Briefly look at findings of one paper that
estimated agglomeration economies.
– Looked at both urbanization and localization
economics
• I haven’t assigned this, but for those who
are interested, the citing is:
– Ronald Moomaw, “Agglomeration Economies:
Localization or Urbanization: Urban Studies, 1988, Vol
25, pp. 150-161.
Empirical Approach
• Take a specific form of the production
function.
– Assume specific form for urbanization and
localization economies.
• Manipulate this equation so that it can be
estimated.
– Mathematically derive a labor demand function
based on marginal productivity theory of
production.
• Estimate parameters of urbanization and
localization.
Findings
• Most urbanized industries typically have
significant urbanization and/or localization
economies.
• Least urbanized industries have no
urbanization or localization economies.
• Agglomeration economies are primarily
localization economies.
• Some evidence of diseconomies of
urbanization.
Agglomeration in Marketing
• Shopping externalities
– Why do these exist?
• Imperfect substitutability
• Complementarity in goods
– Shopping malls
– Retail clusters
• These have been changing
– Why and how?
History of Urbanization
• Look at figure in book (2-4)
– Urbanization at about 7% in 1800
– Urbanization at about 75% by 1990.
• Variety of factors at work
• Look at Role of Industrial Revolution
– Agricultural Revolution
– Manufacturing Revolution
– Construction Revolution
• Mr. Otis’ contribution
– Transportation Revolution
• Inter- and intra-city
– All were necessary, none was sufficient to generate
urbanization.
History of U.S. Urbanization:
Centralization and Concentration
1920
Centralization
1790
Decentralization
Concentration
Decon Concentration
1970 1980
Reasons for Decentralization
• Automobile has lead to suburbanization of
population and employment.
• Blight-flight process has reinforced this
process.
– More later in semester.
Limiting Factors on City Growth
• What factors limit size of cities?
–
–
–
–
Internal scale economies
Agglomeration economies
Market size and transportation expenses
Congestion and compensating differentials
What does the Future Hold?
• Telecommunication innovations
• Should these strengthen or weaken pull
towards cities?
• Are these substitutes or complements?
– Can we completely substitute away from faceto-face communication?