Urban Economics Test #2

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Ricardo Model
The price of agricultural land is determined by its fertility.
WTP for hectare of land
total revenue - non-land costs
First Axiom of Urban Economics
Prices adjust to achieve locational equilibrium
Second Axiom of Urban Economics
Self-reinforcing effects generate extreme outcomes
Third Axiom of Urban Economics
Externalities cause inefficiency
Fourth Axiom of Urban Economics
Production is subject to economies of scale
Fifth Axiom of Urban Economics
Competition generates zero economic profit
Bid Rent Per Hectare
=WTP / lot size
Office Bid Rent with Factor Substitution
Capital and land are input substitutes in production of office space
-Building up increases capital cost and decreases land cost
-Capital costs increase with building height
-Vertical transportation systems
-Reinforcement for weight bearing
-The bid-rent curve for office firms is concave without factor substitution and convex with factor substitution
Housing Price Curve with and without Consumer Substitution
Consumer substitution generates a convex rather than a linear housing-price curve. As distance (x) decreases and the price rises, housing consumption (square feet of space) decreases, increasing the slope of the curve (in absolute value).
Locational Indifference
ChangeP h + change x t = 0
Locational Indifference Slope
change P / change x = -t/h
or
change P = -changex*(t/h)
change P
change in price of housing
change x
change in distance
(t)
commuting cost per mile
(h)
housing consumption
Sub-center
An area where employment density is at least 25 workers per hectare and total employment is at least 10,000 workers
Types of sub-center
-Mixed industrial
-Mixed-service
-Specialized manufacturing
-Service-oriented
-Specialized entertainment
Edge Cities
Defining charactersitic, using the threshold of the 5 million sq. feet of office space. Different from other sub-centers because they are relatively recent development
Density Gradient
Percentage change in density per mile from the center
Rise of the Monocentric City
-Innovations in intraurban transportation that decreased the cost of commuting
-Innovations in construction that decreased the cost of building tall buildings
-Large-scale production in cities to exploit localization economies
Demise of the Monocentric City
-Invention of the truck and automobile
-Creation of the highway system
-Firms moved closer to low-wage suburbs
Causes and consequences of sprawl
-Increases in income
-Lower commuting cost decreases the realitve cost of suburban living
-Newer housing stock in suburbs
-Central city problems; fiscal problems, crime, education
Glaeser & Kahn Study
-Suburban households require 58% more land than central city households
-Energy consumption is about the same even though homes are bigger they are energy efficient
-Suburban households drive 30% more
Urban Sprawl: Diagnosis and Remedies
-Spatial expansion results mainly from three powerful forces:
1. a growing population
2. rising incomes
3. falling commuting costs
-Market failures describe a situation in which the invisible hand fails to allocate resources in a socially desirable manner, so as to maximize aggregate economic well-being
Sources of Market Failure
-Failure to take into account the social value of open space
-Failure to recognize the social costs of congestion
-Failure in accounting for costs of new public infrastructure costs
Remedies to correct for market failure
-Development taxes
-Congestion tolls
-Impact fees
European polices and their effect on sprawl
-Higher cost of personal transportation: gas tax and auto sales tax
-Promote small neighborhood shops that facilitate high-density living
-Agriculture subsidies allow fringe farmers to outbid urban uses
-Transportation infrastructure favors mass transit
U.S. policies and their effect on sprawl
-Establish urban growth boundaries
-Development taxes
Median Voter Model
-Series of binary elections
-Winning size is preferred size of median voter
Neighborhood Externalities
-Externalities cause inefficiencies: Axiom 3
-Externalities of neighborhood choice for kids
-Positive/negative adult role models
-Peers in school: focused vs. disruptive
-Group membership
-Adult externalities: job information, drug use
Benefits of "group" membership
Psychological payoffs, opportunities, information
Education production function
Achievement = f(S,T,E,P,H,C)
S - size of class
T - teachers
E - equipment
P - peers
H - Home environment (largest effect)
C - Curriculum
Dissimilarity Racial Index
Shows the proportion of once race that must relocate to achieve racial integration. An index of .64 indicates that to achieve complete integration, 64% of one race would need to relocate.
Diversity
Amount of different races
Intermixing
Amount of segregation
Promotes segregation
-Minimum lot size (MLS) zoning (income segregation)
-Federal public housing policies
-Racial steering
Consequences of segregation
1. Spatial Mismatch Hypothesis
2. Poverty Trap
Spatial Mismatch Hypothesis
The mismatch between residence and workplaces cause relatively low employment rates (inferior access to jobs). Which also requires longer commuting time and higher commuting costs
Poverty Traps
-Low education spending generates lower achievement in poor neighborhoods
-Education more costly in poor neighborhoods: family crises, security, weak preparation
Racial segregation in the 2000 Census:
-Segregation levels between blacks and non-blacks continued their 30 year decline and are now at their lowest point since roughly 1920
-Segregation declined in all but 19 metropolitan areas surveyed
-The decline in segregation results from the integration of formerly all white census tracts, integration of overwhelming black census tracts
-The West and South are more integrated than the Northeast and Midwest, which remain highly segregated
-Segregation decline seems linked to economic and demographic change
Intended use of zoning
to separate land uses that are "incompatible". Excludes industry and high-density housing
Unzoned cities compared to zoned cities
-Land use in the city is controlled by restrictive covenants
-Similar in many ways to most other cities
-More strip development (retail and commercial establishments)
-Low-income housing is more plentifucl
Effects of Urban Growth Boundary (UGB)
-The growth control policy decreases the utility of workers throughout the region. The workers in the uncontrolled city lose because their city grows.
-Decrease utility of worker/renters
-Increase value of land within the boundary
-Homeowners: higher land prices benefit landowners
Growth polices that are commonly used
-Limiting building permits
-Development and impact fees
Cost & benefits of a congestion tax
1. Modal substitution: switch to carpool, transit
2. Time of travel: switch to off-peak travel
3. Travel route: switch to less congested route
4. Location choices: change residence or workplace, cutting travel distance
Alternatives to Congestion Tax
-HOV: high-occupancy vehicle lane for carpools and buses
-HOT: high-occupancy or toll; pay to use HOV lanes
-Gas tax
-Transit Subsidy
-Eliminate Parking Subsidy
Mechanisms for internalizing air pollution caused by autos
-Economic approach: tax = marginal external cost of pollution
-Monitoring device allows direct charge for emissions (carbon tax)
-One-time pollution tax depends on expected emissions, but not mileage
-Use gasoline tax insted
Peltzman effect
Tendency of people to adjust their behavior in response to the perceived level of risk, behaving less cautiously where they feel more protected and more cautiously where they feel a higher level of risk.
Role of autos in reducing spatial mismatch
1. access to a car
-Urban low-income families: 27% don't one a car
-Blacks in central cities: 45% don't have access to a car
2. Importance of a car
-Switch from mass transit saves 19 minutes each day and expands search area
-Car owners are more likely to complete job training program and get a job
Three principle implications of empirical studies that have estimated the elasticities of demand for transit
1. Line-haul time (in-vehicle time)
2. Access time (walk and wait time)
3. Monetary cost
Reasons for increased transit ridership over the last few years
-Increase in frequency/speed of buses
-Improvements in walking and waiting time
Modal Choice Model
What it would take for auto users to switch to mass transit, given that the cost of different mode choices vary.
Density thresholds for intermediate level bus service and light rails
-Light rail and bus (40 people per hectare)
-Intermediate bus (31 people per hectare)
Reasons for transit deficits
-Low fares and increased wages
-Increased mileage: service extended to low-density areas
-Small increase in ridership combined with doubling of employment
-Small increase in ridership combined with doubling of employment
-Lower costs from lower wages and flexible work rules
Monocentric model
A special case of the polycentric cities that we see in real life. Can be thought of as an artifact of a particular set of technologies.
Market Value
Amount paid to take ownership
Land Rent
Periodic payment from user to owner
WTP
Maximum amount for lot large enough for production facility
Office Firms
Need to gather, process, and distribute information. Rely on face-to-face contact
Principle of Median Location
Travel distance minimized at median location (desirable location for firms)
-Travel for information exchange
-High opportunity cost of travel for office workers
-Total travel distance increases at increasing rate as distance to center increases.
Role of Factor Substitution
-Capital and and are input substitutes in product of office space
-Building up increases capital cost and decreases land cost
-Capital costs increase with building height
-Vertical transportation system
-Reinforcement for weight bearing
Hectare
=2.5 acres = 108,000 sq. ft
Options for Building Heights
-Low rent: short building is least costly
-Medium rent: medium building is least costly
-High rent: tall building is least costly
Simple model of Housing Price
-Commuting cost is only location factor
-One member of household commutes to employment area
-Monetary (not time) cost of commuting
-Noncommuting travel insignificant
-Ubiquitous public services, taxes, and amenities
Role of Consumer Substitution
-Higher price: higher opportunity cost per sq. ft housing
-Consumers substitute other good for housing, decreasing sq. ft of housing
Total Revenue
=P(x)*Q is convex because housing-price curve is convex
Leftover Principle
Willingness to pay = P(x)*Q-K=Bid rent for land
Role of Factor Substitution in Housing Production
-Response to higher land rent is taller buildings on smaller lots
-Cost savings from factor substitution increase bid rent for land
-Result: bid-rent curve is more convex
Suburbs
-Lower price of housing: higher consumption of housing (square feet)
-Larger suburban footprint (land per household) and lower population density
Lower price of land
Higher consumption of land per sq. ft of housing
Subcenters
-Agglomeration economies encourage firms to locate close to one another - one manifestation of clustering is a subcenter
-Employment subcenter is a non-central area with a job density of min. 25 workers per hectare and total employment of min. 10,000 jobs
Role of Subcenters in a Metropolitan Economy
-numerous in both old and new metro areas
-most jobs are dispersed rather than concentrated in CBDs and subcenters
-CBD contines to serve as place for face time
-firms benefit from proximity to firms in center
-firms in different subcenters interact
Primitive Technology of Freight
Intercity freight: ship or rail
Intracity freight: horse-drawn wagons to port or rail terminal