Presentation on theme: "Adapted from Arthur O’Sullivan, Urban Economics, chapters 8-9"— Presentation transcript:
1 Adapted from Arthur O’Sullivan, Urban Economics, chapters 8-9 Land Use Planning Tools Lecture 2: Land use in the Monocentric and Multicentric CitiesAdapted from Arthur O’Sullivan, Urban Economics, chapters 8-9Notes by Austin Troy
2 Bid Rent of Firms in the CBD Let’s assume a traditional 19th Century city:Central railroad freight terminalCentral marketWorkers travel to center via streetcarGoods go from factory to railroad via horse cartAlso assume fixed factor production
3 Bid Rent of Firms in the CBD Profit fn looks same as in chapter 7= PQ-NC-TC(d)-R(d)Profit= price*quantity – nonland costs- transport costs (function of distance) – rents (function of distance);TC(d)= cost/ton/mile* distance*quantityThen R(d)= PQ-NC-TC(d)
4 Freight Costs and Rents Freight costs decrease with proximity to city centerThrough leftover principle, rents increase as transport costs decreaseHence, there will be a downward sloping bid rent function; it will be linear for fixed factor producers and convex for flexible producers
5 Flexible versus fixed producers Fixed: R(d)= P*Q-NC-TC(d)Flexible: = P*Q-NC-TC(d)-R(d)*L(d),Where L(d) is amount of land used at distance d; this results in rent function:R(d)= (P*Q-NC-TC(d))/L(d)Flexible farmer substitutes nonland for land input: spends more on equipment and labor as land gets more expensive
6 Flexible versus fixed producers Flexible produce = factor substitution = lower costs* = higher profitsBy leftover principle, higher profits= higher bid rentsClose to city center, land costs are lower; at periphery, freight costs are lower
7 Monocentric city firms’ bid rent function flexible producerThe flexible firm outbids the fixed factor firm everywhere but point u’’. At u’, the fixed factor producer uses too much landBid RentBFixed-factor producerAu’u’’Distance from export hub
8 Nonland versus land inputs for the Flexible producer Non-land inputsBflexible producerALand Amount
9 Most central firm type: offices Office firms: require 1) lots of meetings and face to face contact, 2)ability to gather, process and distribute information quickly and 3)access to services, like printing, lawyers, designers, accountants, etc.This type of firm will have a steep bid rent function because the travel cost of individuals is very high; travel cost is high because their pay rate is high, since it is generally skilled work
10 Land use in CBDAll firms are attracted to center, but only some will be willing to bid enoughOffice firms have steepest bid rent fn, and will occupy the most central landMarket allocation is efficient, because the office industry has the most to gain from being in the center; manufacturing could gain too, but not as much, so it’s willing to locate a little further out.
11 Office vs. manufacturing Suppose office firm 1 block from center and manufacturer 5 blocks. If they swapped locations, this would dramatically increase the office firm’s travel costOffice firm TC= 3min/block*$4/min*200 meetings/month= $2400 per block/monthSo the swap increase TC for office by $9,600/mo, but only saves the manufacturer $800/month in transportation costs (50 tons * $4/ton/block= $200/block).
12 Multiple land use rent gradient Office Bid rentManufacturingzoneResidentialzoneBid RentManuf. Bid rentResidential bid rentOffice zoneU’U’’Distance to center
13 Locational choices Residential Zone Manufacturing Zone Office Zone U’
14 Locational choicesSo workers live on the periphery because they are cheap to transport (i.e. commuting costs are low) relative to cost of moving freight (for manufacturers). For offices, same problem, because of high price of moving executives around for meetings. If office is in suburbs, executive is constantly going to CBDResidential ZoneManufacturing ZoneOffice ZoneU’U’’
15 Who occupies what?Activities are arranged according to transport costs; those with the highest costs occupy the most central landActivity with the highest transport cost will have the highest bid rent curveAll firms have tug-of-war between locating centrally to keep transport cheap, and locating in the suburbs to keep workers’ commute cost lower (and hence pay lower wages)CBD wins because cost of freight hauling greater than cost of moving workers
16 Housing price function In the monocentric model, residents will be attracted towards the center but be outbid by offices and manufacturing.Assume no factor substitution, identical 1000 sq ft houses, fixed budget of $300/mo for housing+commuting, commute cost (CC)= $20/mi.WTP for housing = $300- CC.
17 Housing price fuction$.3D for housing near center pushes up price until rent= budget-CC.P housing/ sq ftResidents now indifferent among all locations in city$.18$.066 mi12 mi
18 Housing price function with consumer substitution With consumer substitution, residents consume less land as price of land goes up; instead consume more local amenitiesHence, more central homes are smallerFlexible residents will outbid fixed factor residents everywhere but tangency pointChange in P due to distance= , or negative of (tranpo cost/mi divided by amount of housing consumed)
19 Residential housing price function with consumer substitution $.3Price w consumer subP housing/ sq ft$.18$.066 mi12 mi
20 Residential bid rent function and factor subsitution Residents’ housing price fn with consumer substitution drive producers’ factor substitutionFactor Substitution: Housing producers substitute capital for land as move closer to center; higher density allows residential housing firms to pay the higher cost of land in more central locations. Different from consumer substitutionProducers’ bid rent functions are convex because of consumer substitution in the housing price function
21 Density increases towards center because: Consumer substitution in housing pr fn.P(housing) goes down away from center, so households consume more housing (i.e. larger dwellings) towards peripheryFactor substitution in producer bid fnPrice of land goes down as move away because of housing price function; housing production firms respond by using more land per unit of housing (less density) towards periphery; towards center they respond with greater density
22 Changes to Residential Model All the following changes in assumptions make cost of commuting greater, and housing price fn/residential bid rent fn steeper:No time cost to commuting (only monetary cost)>> time cost to commuting (opportunity cost)Amenities (shopping, recreation) etc. are evenly distributed across city>> Amenities concentrated in the CBDAll households one earner>>two earners commuting to center
23 Spatial heterogeneity In reality (we’ll get to this later) there is considerable variation in services and amenities throughout urban areaSchools: suburban areas often have best schools and people will bid up price of housing to live in those districts.Same idea with environmental quality, scenic values and tax rates
24 Income segregationSimple monocentric model would suggest that rich occupy most valuable (central) landWhy is it the opposite?Households find location providing best tradeoff between land and commuting costBecause the rich person consumes much more housing, they save much more for each move out
25 Income segregationIn other words, MB=MC at much closer point to CBD for the poorThey have less to gain from moving outward because they can’t afford to consume nearly as much housing (that is, as big houses)But their commuting costs are not much less than that of the richAs income increases, housing consumption increases faster than commuting costs
26 Segregation and Income Elasticity Income elasticity of demand for housing is high; that is, housing consumption goes up significantly (is elastic) in response to income increaseWhen IEDH is large relative to income elasticity of commuting cost, gap between MB curves will be much greater than gap between MC curves
27 Income segregation-High IEDH relative to IECC MB(rich)MC(rich)$40MC(poor)$20MB(poor)U’U’’
28 Income segregation- similar IEDH relative to IECC MB(rich)MC(rich)$40MC(poor)$20MB(poor)U’’
29 Empirical EvidenceOne study (Wheaton 1977) has found that IEDH is roughly equal to IECCIf this is the case, then different income groups should be living in the same placesOther explanations needed
30 Other Explanations for Income Segregation Newer housing in suburbs: quality is higher, more modern, lower maintenance; poor get stuck with older central city housing“Urban flight:” crime, low school achievement, fiscal problems all more common in city centers. Rich can afford to leaveLarge-lot suburban zoning: very common, keeps price of housing high and poor out
31 Income Segregation and Bid Rents Rich BR is flatter:1.If IEDH > IED of commuting costs or2. because of the draw of suburban land and the negatives of central city livingBR-richBR-pooru*
32 ExceptionsIn some cities, especially in Europe, the opposite is true: rich live in center, which is prohibitively expensive for poor, who live out in suburbs.Has to do with level of amenities in the city center (e.g. Paris vs. Detroit).
33 Why do poor have steeper housing price functions? Slope functionIncrease in income both t and H(u)If D for housing is more responsive to income than commuting costs are to income (due to increase in opportunity cost), then rich have flatter curve;that is they have a powerful urge to consume landBut if Wheaton’s results are correct, the slopes should be the same, so what’s up??
34 Alternative Explanation Slope of housing price fn must be affected by other factors, such as:Tax rates, school quality, pollution, crimeCentral city problems cause demand for suburban land to go upIf IED for low pollution, low crime, good schools, etc. is high relative to IED for commuting, then wealthy will have flat fnThat is, wealthy willing to pay more for these goods than the poor are and will outbid them on fringes
35 Policy RamificationsPolicies that help rebuild the inner cities, bring amenities, decrease crime and pollution, improve schools, will bring some wealthy back from suburbsPolicies that limit exclusionary (large-lot) zoning will help bring poor out to suburbs and allow for higher suburban densities
36 Policy Intervention: Labor and land markets What happens to business and residential location if we put in a streetcar system?Assumptions: no consumer or input substitution (fixed factor), population density the same at all residential locations, business density same in business locations, city is rectangular
37 Relative Locations before streetcar Business bid rent fnBid rentsResidential bid rent fnAgricultural rentDistance9 mi2 miResidential zoneag zoneBusiness zone
38 Now add a streetcar system Streetcar decreases commuting costs, tilts residential bid rent fn outwardsResidential area expands into ag landLabor supply increases with S(housing)Increase in labor S decreases wageWage decreases causes intercept of residential fn to shift down, while business bid rent fn shifts up, because costs are lowerLower costs mean firms willing to pay more for CBD land, businesses occupy more land
39 Relative Locations before streetcar Business zoneag zoneBusiness bid rent fnResidential bid rent fnAgricultural rentResidential zoneBid rentsDistance2 mi9 mi
40 Effect of reduced commute cost Business bid rent fnBid rentsResidential bid rent fnAgricultural rent2 mi17 miResidential zoneag zoneBusiness zone
41 Effect of reduced wage on residential bid rents Business bid rent fnBid rentsResidential bid rent fnAgricultural rent~2.5 mi13.5 miResidential zoneag zoneBusiness zone
42 Effect of reduced wage on residential bid rents Business bid rent fnBid rentsResidential bid rent fnAgricultural rent3 mi13.5 miResidential zoneag zoneBusiness zone
43 Long term equilibrium effects Eventually, the shrinking of the residential area brought about by lower wages reduces labor supply, while demand for labor goes up in response to larger business district.End result: residential and business districts are now in between original size and largest size following short-term effects; land rent is higher everywhere
44 Are there any welfare benefits from streetcar in long term? No: commuting is more efficient, but wages are lower and rents are higher in response; this is because it is an “open city.” We assume that any advantages brought about by upgrade are quickly eliminated by in-migration; migration stops when there are benefits offset the costs (lower wages, higher rents).
45 Spatial distribution in modern, multicentric cities Jobs are generally far from city centers now40% commute from suburban home to suburban jobCities are increasingly decentralizing with smaller portion of population in centerAs population shifts outward, density gradients have decreased significantly
46 Why are we decentralizing? Rising income? This will cause decentr. If IED for housing> IE of commuting. Some studies support thisLower commuting costs due to better roads, better cars, transit systemsUrban problems: old housing, income/racial mix, fiscal problems, crime, educationThere is considerable empirical support for this
47 Why decentralized manufacturing? Intracity truck: in tug of war between desiring to be near workers and be near central export node, the latter began to lose out as trucks reduced price of getting freight to and from the node. I.e. cost of moving freight high relative to moving people in old days; now the opposite
48 Why decentralized manufacturing? Intercity truck: truck is now competitive with trains and shipping, making central export node less relevant. This decreased freight costs associated with suburban settings. The biggest single factor increasing cost effectiveness of intercity truck was interstate highway system.Now manufacturers locate close to suburban highway interchanges. Beltways maximize access to interstates; result in manufacturing ring
49 Suburban manufacturing without truck Total cost$i=ideal location w/out trucklabor costFreight costFirm locates at city centerDistance
50 Suburban manufacturing with truck $j=ideal location with truckTotal costlabor costFreight costFirm locates at city centerDistance
52 Additional factors pulling manufacturing towards suburbs Single story plants using assembly line production; require more land than traditional multi story plantsAirports: require a lot of land and tend to be on fringes; many firms transport by air freightCars: with demise of hub and spoke streetcar system, firms now locate where they are most reachable by car: highway exits.
53 Offices drawn to suburbs by -Decoupling of operations: increase in splitting offices into front and back officesBetter communication and connectivity: , phones, Internet, teleconferencesMany businesses now are less reliant on face to face meetingsHowever, there will always be advantage to downtown clustering for certain types of firms that require face to face contact