Adapted from Arthur O’Sullivan, Urban Economics, chapters 8-9 Land Use Planning Tools Lecture 2: Land use in the Monocentric and Multicentric Cities Adapted from Arthur O’Sullivan, Urban Economics, chapters 8-9 Notes by Austin Troy

Bid Rent of Firms in the CBD Let’s assume a traditional 19th Century city: Central railroad freight terminal Central market Workers travel to center via streetcar Goods go from factory to railroad via horse cart Also assume fixed factor production

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*quantity Then R(d)= PQ-NC-TC(d)

Freight Costs and Rents Freight costs decrease with proximity to city center Through leftover principle, rents increase as transport costs decrease Hence, there will be a downward sloping bid rent function; it will be linear for fixed factor producers and convex for flexible producers

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

Flexible versus fixed producers Flexible produce = factor substitution = lower costs* = higher profits By leftover principle, higher profits= higher bid rents Close to city center, land costs are lower; at periphery, freight costs are lower

Monocentric city firms’ bid rent function flexible producer The flexible firm outbids the fixed factor firm everywhere but point u’’. At u’, the fixed factor producer uses too much land Bid Rent B Fixed-factor producer A u’ u’’ Distance from export hub

Nonland versus land inputs for the Flexible producer Non-land inputs B flexible producer A Land Amount

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

Land use in CBD All firms are attracted to center, but only some will be willing to bid enough Office firms have steepest bid rent fn, and will occupy the most central land Market 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.

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 cost Office firm TC= 3min/block*$4/min*200 meetings/month= $2400 per block/month So 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).

Multiple land use rent gradient Office Bid rent Manufacturing zone Residential zone Bid Rent Manuf. Bid rent Residential bid rent Office zone U’ U’’ Distance to center

Locational choices Residential Zone Manufacturing Zone Office Zone U’

Locational choices So 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 CBD Residential Zone Manufacturing Zone Office Zone U’ U’’

Who occupies what? Activities are arranged according to transport costs; those with the highest costs occupy the most central land Activity with the highest transport cost will have the highest bid rent curve All 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

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.

Housing price fuction $.3 D for housing near center pushes up price until rent= budget-CC. P housing/ sq ft Residents now indifferent among all locations in city $.18 $.06 6 mi 12 mi

Housing price function with consumer substitution With consumer substitution, residents consume less land as price of land goes up; instead consume more local amenities Hence, more central homes are smaller Flexible residents will outbid fixed factor residents everywhere but tangency point Change in P due to distance= , or negative of (tranpo cost/mi divided by amount of housing consumed)

Residential housing price function with consumer substitution $.3 Price w consumer sub P housing/ sq ft $.18 $.06 6 mi 12 mi

Residential bid rent function and factor subsitution Residents’ housing price fn with consumer substitution drive producers’ factor substitution Factor 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 substitution Producers’ bid rent functions are convex because of consumer substitution in the housing price function

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 periphery Factor substitution in producer bid fn Price 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

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 CBD All households one earner>>two earners commuting to center

Spatial heterogeneity In reality (we’ll get to this later) there is considerable variation in services and amenities throughout urban area Schools: 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

Income segregation Simple monocentric model would suggest that rich occupy most valuable (central) land Why is it the opposite? Households find location providing best tradeoff between land and commuting cost Because the rich person consumes much more housing, they save much more for each move out

Income segregation In other words, MB=MC at much closer point to CBD for the poor They 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 rich As income increases, housing consumption increases faster than commuting costs

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 increase When IEDH is large relative to income elasticity of commuting cost, gap between MB curves will be much greater than gap between MC curves

Income segregation-High IEDH relative to IECC MB(rich) MC(rich) $40 MC(poor) $20 MB(poor) U’ U’’

Income segregation- similar IEDH relative to IECC MB(rich) MC(rich) $40 MC(poor) $20 MB(poor) U’’

Empirical Evidence One study (Wheaton 1977) has found that IEDH is roughly equal to IECC If this is the case, then different income groups should be living in the same places Other explanations needed

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 leave Large-lot suburban zoning: very common, keeps price of housing high and poor out

Income Segregation and Bid Rents Rich BR is flatter: 1.If IEDH > IED of commuting costs or 2. because of the draw of suburban land and the negatives of central city living BR-rich BR-poor u*

Exceptions In 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).

Why do poor have steeper housing price functions? Slope function Increase 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 land But if Wheaton’s results are correct, the slopes should be the same, so what’s up??

Alternative Explanation Slope of housing price fn must be affected by other factors, such as: Tax rates, school quality, pollution, crime Central city problems cause demand for suburban land to go up If IED for low pollution, low crime, good schools, etc. is high relative to IED for commuting, then wealthy will have flat fn That is, wealthy willing to pay more for these goods than the poor are and will outbid them on fringes

Policy Ramifications Policies that help rebuild the inner cities, bring amenities, decrease crime and pollution, improve schools, will bring some wealthy back from suburbs Policies that limit exclusionary (large-lot) zoning will help bring poor out to suburbs and allow for higher suburban densities

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

Relative Locations before streetcar Business bid rent fn Bid rents Residential bid rent fn Agricultural rent Distance 9 mi 2 mi Residential zone ag zone Business zone

Now add a streetcar system Streetcar decreases commuting costs, tilts residential bid rent fn outwards Residential area expands into ag land Labor supply increases with S(housing) Increase in labor S decreases wage Wage decreases causes intercept of residential fn to shift down, while business bid rent fn shifts up, because costs are lower Lower costs mean firms willing to pay more for CBD land, businesses occupy more land

Relative Locations before streetcar Business zone ag zone Business bid rent fn Residential bid rent fn Agricultural rent Residential zone Bid rents Distance 2 mi 9 mi

Effect of reduced commute cost Business bid rent fn Bid rents Residential bid rent fn Agricultural rent 2 mi 17 mi Residential zone ag zone Business zone

Effect of reduced wage on residential bid rents Business bid rent fn Bid rents Residential bid rent fn Agricultural rent ~2.5 mi 13.5 mi Residential zone ag zone Business zone

Effect of reduced wage on residential bid rents Business bid rent fn Bid rents Residential bid rent fn Agricultural rent 3 mi 13.5 mi Residential zone ag zone Business zone

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

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).

Spatial distribution in modern, multicentric cities Jobs are generally far from city centers now 40% commute from suburban home to suburban job Cities are increasingly decentralizing with smaller portion of population in center As population shifts outward, density gradients have decreased significantly

Why are we decentralizing? Rising income? This will cause decentr. If IED for housing> IE of commuting. Some studies support this Lower commuting costs due to better roads, better cars, transit systems Urban problems: old housing, income/racial mix, fiscal problems, crime, education There is considerable empirical support for this

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

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

Suburban manufacturing without truck Total cost $ i=ideal location w/out truck labor cost Freight cost Firm locates at city center Distance

Suburban manufacturing with truck $ j=ideal location with truck Total cost labor cost Freight cost Firm locates at city center Distance

Manufacturing bid rent and beltways

Additional factors pulling manufacturing towards suburbs Single story plants using assembly line production; require more land than traditional multi story plants Airports: require a lot of land and tend to be on fringes; many firms transport by air freight Cars: with demise of hub and spoke streetcar system, firms now locate where they are most reachable by car: highway exits.

Offices drawn to suburbs by -Decoupling of operations: increase in splitting offices into front and back offices Better communication and connectivity: email, phones, Internet, teleconferences Many businesses now are less reliant on face to face meetings However, there will always be advantage to downtown clustering for certain types of firms that require face to face contact