Urban economics

In his doctoral dissertation, Alonso (1964) succeeded in extending Thunen’s concept of bid rent curves to an urban context in which a marketplace is replaced by an employment center (the central business district - CBD).

In equilibrium, identical consumers establish themselves within the city so as to equal­ize utility across space. In such a state, no one has an incentive to change location, the land rent at a particular location being equal to the largest bid at that location. Building on this idea, urban economists have endeavored to explain the internal structure of cities, that is, how land is distributed across activities and economic agents around the CBD. Though very simple, the monocentric city model has produced a set of results consistent with the prominent features of cities.

Very much as in the Thunen model which does not say why transactions take place in a given market town, the monocentric city model is silent on the reasons that would explain the existence of a district where jobs are available. So, we are left with the fol­lowing question: why do city centers exist? Or, more generally, why do cities exist? This question has haunted economic geography for decades.

Beckmann (1976) views personal relations as the essence of societies, even though the consequences of relations are often double edged. The propensity to interact with others has a gravitational nature in that its intensity increases with the number of people living in each location and decreases with the distance between two locations. Beckmann then focused on the trade-off between the desire of an individual to interact with others and her need to consume a large plot of land. Under such preferences, the spatial equilibrium exhibits a bell-shaped population density supported by a similarly shaped land rent curve, and thus face-to-face contact supports urbanization. This provides an illuminat­ing explanation for the existence of cities, which combines the natural gregariousness of human beings together with their desire to consume more space.

Although very suggestive, this approach does not explain the existence of an employ­ment center because firms are left aside. Thus, beyond the standard market transactions in which firms are involved, one may wonder what the interactions that would foster their concentration are. The reason here is very different from what Beckmann assumed in that it refers to the role of information as a basic input in firms’ activities, a kind of information difficult to codify because it is tacit and which can be collected through face-to-face communications only.

The seminal contribution in this respect is due to Ogawa and Fujita (1980) who explored the implications of spillovers, the intensity of which is affected negatively by a distance-decay effect. Specifically, the agglomeration force finds its origin in the exist­ence of the exchange of information which allows companies to learn from each other how to do things better. The transmission of tacit knowledge and information often requires face-to-face communication between agents, which typically involves distance­sensitive costs. Hence the benefits of information are larger when firms locate closer to each other. On the other hand, the clustering of many firms into a single area increases the average commuting distance for their workers which, in turn, leads to higher wages and land rent in the area surrounding the cluster. Such high wages and land rents tend to discourage the agglomeration of firms and acts as a dispersion force. Consequently, the equilibrium distributions of firms and households/workers are determined as the balance between these two opposite forces.

Ogawa and Fujita showed that high commuting costs lead to a completely mixed con­figuration, that is, a pattern with no land specialization and no commuting. As commut­ing costs fall while the intensity of communication between firms rises (two fairly general trends observed since the development of the Industrial Revolution), one moves from backyard capitalism to a monocentric city with complete specialization of land. In other words, low commuting costs and/or strong spatial externalities foster the emergence of a monocentric city in which firms gather to form a central business district.

Despite many progresses in urban economics, the most enduring problem, that is, the existence of an urban hierarchy involving large and medium-sized cities as well as towns and villages, remains unsolved. Although Christaller (1933) has forcefully argued that the number of goods supplied in a city rises with its size, with the manufactured goods supplied in a low-rank city being also supplied in cities of higher rank, there is still no comprehensive microeconomic model explaining the urban hierarchy. So far, the most elegant proposal to describe how cities having different sizes emerge has been provided by Henderson (1974, 1988). In each city, there is again a tension between two forces. On the one hand, there are external economies associated with the agglomeration of firms at the city center. On the other hand, there are diseconomies generated by the need to commute to the city center. Hence, in equilibrium, each city has a well-defined size that depends on the type of firms it accommodates. As cities vary in their industrial mix, they have different sizes because industries differ in the external economies they are able to create. The setting remains incomplete, however. Cities are like floating islands because nothing is said about their relative locations. Furthermore, the model is silent on why and how cities get specialized in particular activities, whereas a few real-world cities are diversified.