Determinants of City Size. Econ 312 Martin Farnham

Transcription

1 Determinants of City Size Econ 312 Martin Farnham

2 City Size Varies Dramatically Cities and towns come in variety of sizes, and differ in composition of firms and people A town may have 100 residents, or 10,000; a city may have 50,000 or 5 million or more What determines city size? Why are most cities small, but some huge? 1

3 Is Bigger Better? Depends. Remember that there are costs and benefits associated with city size Benefits: Agglomeration externalities; additional consumer opportunities Costs: Congestion, commuting costs As in most cases in economics, the existence of both costs and benefits mean that an optimal balance exists (between too much and too little population) 2

4 Is Bigger Better? Define utility ($): u=income-commuting cost-rent paid Slope positive where agglomeration gains exceed commuting costs Slope negative where commuting costs dominate Optimal city size is 2 million (just example!) U($) Utility per worker and City Size Workers (millions) 3

5 Consider System of Cities with Interurban Mobility If one city gives higher utility than another city, then people will migrate to that city until prices adjust to eliminate incentive to migrate Example: Suppose Edmonton and Victoria have equal rents and income opportunities. Everyone would leave Edmonton if this were true Rents must fall (or wages must rise) to keep everyone from leaving. Migration will occur until utility is equalized across cities. 4

6 System of Cities Consider region with 6 million population; three sample cases 1) 6 cities of 1 million 2) 3 cities of 2 million 3) 2 cities of 3 million 1) and 2) are equilibria, but not stable; and 3) is an equilibrium; only 2) is socially optimal U($) Utility per worker and City Size

7 Notion of Stable vs. Unstable Equilibria may be new to you In supply-demand model, there s only one equilibrium and it s stable; if price gets pushed above the equilibrium price, excess supply ensures that price (and quantity) will return to equilibrium In more complex economic models, there can be multiple equilibria Some may be stable (i.e. if we perturb the system away from a stable equilibrium, it returns to that equilibrium) Others may be unstable (i.e. if we perturb the system away from an unstable equilibrium, it moves away to another equilibrium) Example: If you perch at the top of a pyramid, you re in an equilibrium, but it s not a stable one (if you fall, you ll end up at the bottom of the pyramid; you won t fall back to the top) 6

8 System of Cities Why is Case 1) is not a (stable) equilibrium? Suppose some people move from one small city to other. One city gets bigger (and better), the other city gets smaller (and worse). Thus people keep leaving, until smaller city disappears. As long as more than one city is on upward sloping part of utility curve, at least one city will shrink and disappear. 7

9 System of Cities Why Case 2) is not a stable equilibrium. No one benefits from moving. Utility is equalized between 3 cities, so no migration incentive exists (it s an equilibrium). However, suppose a few people move from City A to City B. U falls in both A and B but remains stable (in C). So people will now migrate from A and B to C. This will cause A to shrink further (it s on the left side of its peak), eventually to nothing. (draw this!) Note: 2) is also socially optimal, because each of the 6 million people get the highest 8 possible utility.

10 System of Cities Why Case 3) is a stable equilibrium Because if some people move from one city to another, the city they move to becomes a less nice place and the city they move away from becomes nicer. Therefore, immediately some others will migrate in reverse direction, until population (and utility) is equalized. Note that this society would be better off with 3 cities of 2 million, but they re stuck in this equilibrium. An example of a coordination failure in economics. Leads to sub-optimal (but equilibrium) outcome. 9

11 How do External Economies Drive Differences in City Size? Some industries (generally knowledge intensive) have larger localization economies Will tend to form particularly large clusters (big cities) Industries with smaller localization economies will form smaller clusters Firms with large urbanization economies will tend to seek out large metropolitan areas to locate==>the big get bigger! Note that rising land prices/congestion will eventually overtake external economies, putting a brake on city size 10

12 Specialized vs. Diverse Cities Some cities are very focused on a couple big industries; others have lots of different small industries Specialized cities will tend to be smaller Diverse cities larger Firms that benefit from localization economies will tend to locate in specialized cities Firms that benefit from urbanization economies will tend to locate in diverse cities. Young firms tend to benefit from diversity until they settle down and figure out their production process; then they tend to move to specialized city 11

13 Cities and Local Employment Consumer offerings tend to be more diverse in larger cities Don t need much population to support a plainvanilla grocery store, but need a pretty big population to support lots of ethnic specialty stores, museums, theater, etc. Large cities will tend to attract people who provide these types of services--contributes further to big getting bigger The local employment per export job is likely, therefore, to be higher in big cities than in small. 12

14 Cities and Local Employment Local employment (and the tendency of this share to be bigger in big cities) magnifies gap in city size between big and small Part of explanation for why there are just a few super big cities. The big get bigger (subject to commuting/ congestion costs) 13

15 Why Do Countries/Regions Tend to Have Single Giant City? Why don t we observe lots of mediumsized cities? 1 theory is that there are economies of scale in international trade (due to port infrastructure and operations) Would suggest that countries involved in trade tend to have large primary cities that are central transit point for imports/exports 14

16 Why Large Primary City? Krugman makes opposite argument about trade Large cities have lower transport costs for getting goods from producers to consumers (consider country closed to int l trade) To the extent that firms bear transport costs, this will translate into higher wages in bigger cities To the extent that consumers bear transport costs, this will translate into lower prices in bigger cities Either way, real wages will be higher in larger cities BUT...notice that this argument doesn t work as well for a country that exports a lot of its 15 production and imports a lot of its consumption.

17 Why Large Primary City? Presence of international trade lessens these clustering benefits of large cities over small cities If fraction of consumer goods coming from abroad is high, benefit to consumers of locating near local producers in large city falls (after all, they re only getting the advantage of proximity for goods produced near them not ones brought in from overseas). Also, if fraction of locally produced goods being exported abroad rises, firms are selling less of their goods to domestic customers hence have less need to locate near local population Overall effect; with international trade, there is less incentive for workers/consumers to live in large city. 16

18 Why Large Primary City? Krugman ignores economies of scale in ports, so assumes all cities export to and import from abroad Imports cost the same (equal net cost) in all cities So as consumers buy more imports, it becomes less beneficial to live in big city (smaller fraction of consumption bundle benefits from transport cost savings) Also, real wage premium from big city declines, because all exporters (regardless of location) face same outgoing transport costs; another reason for workers not to bother with big city and its higher commuting costs 17

19 Why Large Primary City? Krugman s model predicts countries that are closed off to trade will tend to have large primary city Note: Once we impose port economies of scale on Krugman s model, we can recover first result that trade encourages forming of single giant city Vancouver in West, Toronto in East Land connections to US complicate this Hard to apply model to Canada s interior due to lack of ports 18

20 Roman Model of Extractive Cities Romans taxed outlying regions; placated restless urban population with Bread and Circuses Free food and entertainment made Rome an attractive place to live, encouraged population growth Andes and Glaeser (1995) argue that modern-day dictatorships do same thing Tax hinterlands, subsidize urbanites who might otherwise demand reforms from government Thus would expect dictatorships to have larger primary city than democracies 19

21 Extractive Primary City Baghdad (during Saddam) Kurds, Shiite populations concentrated outside Baghdad Sunni population concentrated in and around Baghdad Monuments, museums, good public services available to population of Baghdad, much less to other parts of population Baghdad stole electricity from neighboring cities; lights were always on in Baghdad, but not elsewhere; this changed after Saddam was ousted 20

22 Communications and Cities Do telecommunications advances make cities bigger or smaller? Once upon a time, clustering was vital to facilitate communication. Mail used to be very expensive (in real terms) and slow No telephone, telegraph, overnight mail Now people can work on a project together across continents , faxes, video conferencing, telecommuting, reduce the benefits of clustering for communication purposes 21

23 Communications and Cities This creates an image of telecommuting from Tofino, etc. No need for cities? Especially as video-conference technology improves? This view ignores some important issues 1) Cities still have amenities that can t be obtained elsewhere (this suggests cities won t disappear) 2) Many still place value on face-to-face contact (this also suggests cities won t disappear) 3) Such contact may be complementary to technology (this suggests telecom tech could actually cause cities to grow) 22

24 Communications and Cities Is face-to-face contact complementary with electronic communication? Maybe better communication facilitates more contacts with other people So even if the need for face-to-face contact declines on a per client basis, it could rise overall Large fraction of cell-phone use is about facilitating meeting up with people (not avoiding the need for face-to-face contact) Communications technology may allow for reductions in commuting costs (real-time toll adjustments, traffic routing, etc.)==>allow bigger cities. 23