1. McGraw-Hill/Irwin ©2009 The McGraw-Hill Companies, All Rights Reserved Chapter 4 City Size

2. ©2009 The McGraw-Hill Companies, All Rights Reserved4-2 Why Do Cities Vary in Size and Scope?

3. ©2009 The McGraw-Hill Companies, All Rights Reserved4-3 Localization and urbanization economies increase productivity & wage Commute time increases with city size, decreasing leisure time Utility and City Size

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5. ©2009 The McGraw-Hill Companies, All Rights Reserved4-5 C: Differences in commute cost offset by differences in land rent E: Equal shares of land rent, averaging $15 Utility = Labor income + rental income - commute cost - rent paid Locational Equilibrium Within a City

6. ©2009 The McGraw-Hill Companies, All Rights Reserved4-6 Divide fixed number of workers among cities in region Six cities, each with 1 million workers Three cities, each with 2 million workers Two cities, each with 3 million workers System of Cities in a Region

7. ©2009 The McGraw-Hill Companies, All Rights Reserved4-7 Figure 4-2 Cities May Be Too Large Along the negatively sloped portion of the utility curve, changes in population are self-correcting

8. ©2009 The McGraw-Hill Companies, All Rights Reserved4-8 Figure 4-2 Cities Are Not Too Small Along the positively sloped portion of the utility curve, changes in population are self-reinforcing

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10. ©2009 The McGraw-Hill Companies, All Rights Reserved4-10 Two types of cities are complementary Many firms start in diverse city, which foster new ideas Maturing firms relocate to specialized cities to exploit localization economies Specialized and Diverse Cities

11. ©2009 The McGraw-Hill Companies, All Rights Reserved4-11 Firm gropes for ideal production process for new product by building prototypes, imitating other firms in the process Once ideal process found, firm produces large quantity in a specialized city Location for experimentation: Diverse city or series of specialized cities? Diverse city: Relatively high prototype cost, given lack of localization economies Specialized cities: Move from one city to another until ideal process found Diverse city is more profitable if moving costs are relatively large A Model of Laboratory Cities

12. ©2009 The McGraw-Hill Companies, All Rights Reserved4-12 Early firms were “small, numerous, agile, nervous, and heavily reliant on subcontractors” NYC provided a wide variety of intermediate inputs and workers Once technology settled, firms relocated to economize on labor cost Example: The Radio Industry in New York

13. ©2009 The McGraw-Hill Companies, All Rights Reserved4-13 French firms: 7 of 10 relocations from diverse to specialized city Most innovative firms have highest frequency of moves from diverse to specialized Evidence of Laboratory Cities

14. ©2009 The McGraw-Hill Companies, All Rights Reserved4-14 Why do cities differ in size and scope? Preview: Differences in localization & urbanization economies Introduction of local goods amplifies differences in size Differences in City Size: Introduction

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19. ©2009 The McGraw-Hill Companies, All Rights Reserved4-19 Some local goods (haircuts, groceries, pizza) sold in all cities, large & small Per-capita demand large relative to scale economies in production Local employment roughly proportional to population Some local products (brain surgery, opera) sold only in large cities Per-capita demand small relative to scale economies in production Local employment concentrated in larger cities Larger cities have wider variety: pizzas, haircuts, opera, brain surgery Local Goods and City Size

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22. ©2009 The McGraw-Hill Companies, All Rights Reserved4-22 Rank = C / Nb Rank-size rule holds if b = 1: Rank N = C Empirical results Median estimate b = 1.09: Close to rank-size rule, but more even distribution Definition of economic city: b = 1.02 The Rank-Size Rule

23. ©2009 The McGraw-Hill Companies, All Rights Reserved4-23 The Puzzle of the Large Primary City

24. ©2009 The McGraw-Hill Companies, All Rights Reserved4-24 Trading and indivisibilities in import/export facilities Neglect of intra-national transportation facilities Politics: Dictators retain power by bribing likely rebels in large capital city (Roman circus) Reasons for Large Primary Cities