1. WHY CITIES?

2. Questions for Discussion
1. Consider a region that has a single trading city. There are no shopping externalities and communication between households is costless. Suppose that a matter transmitter is introduced into the region. The transmitter costlessly transports goods, but cannot be used to transport people. The transmitter is cheap enough that every household can purchase one at relatively low cost.
A.Explain the effects of the matter transmitter on urban development.
B. How would your answer change if cloth from one household was not a perfect substitute for cloth from another?

3. Why do cities exist? Transportation Costs -- Economies of Scale
Economies of Scale in Production
Agglomeration Economies
Localization Economies -
Urbanization Economies
Economies of Scale in Transportation -- Trading Cities
Economies of Scale in Production - The Factory City; Market Size of Factory city and role of transportation costs. Sketch graph
How Do We Explain Larger Cities?
Agglomeration Economies -- Positive externalities in production (by locating close to one another firms can produce at lower cost) or in consumption (by locating close to one another firms can increase demand for their products or services)
Localization economies -- externalities associated with clustering of firms within an industry
Urbanization economies -- externalities associated with high densisty

4. Agglomerative Implications of Size & Diversity in Cities
Trading cities -- comparative advantage; economies of scale in grain storage or shipping. Economies of scale in defense -- protection from maruaders -- building of walls. According to Lewis Mumford -- the development of the first cities coincided with development of large scale religion. Shift from local earth gods to celestial gods. Definition of public goods. Emphasize the importance of scale economies in the provision of local public goods. Observe that there are market areas for provision of public goods. Some are clearly “local”
Shared inputs -- economies of scale in provision of intermediate inputs; high transportation costs or other factors require that suppliers of inputs be close to the buyers of inputs. The high end dress designer example. Weight losing activities; Contrast with weight gaining activities.
Transaction costs -- costs of search are lower. Search particularly important for consumers when goods (workers) are heterogeneous. Monopolistically competitive firms face a trade off between reduced price competition associated with isolation and the greater potential market associated with clusters. Clusters also may emerge for complementary products.
Statistical economies/ Benefits from diversity -- Labor market pooling. Diversification of risk (Discuss risk aversion. Use problem from book)
Source: Modified from Quigley,1998

5. Evidence of Agglomeration Economies
Industries do have a tendency to cluster
Theme parks; Silicon valley and Route 128 in Boston; Shopping malls
Other explanations for clusters?
Knowledge spillovers and patents (Jaffe et al)
Econometric studies and problems
Basic equation: Output per worker=f(Capital,Size of Industry in City, Size of City)
Multicollinearity; measurement error; heteroskedasticty
Other explanations for clusters
Access to natural resources
Local tax structure -- pharmaceuticals in Puerto Rico

6. Source: O’hUallacháin,
Textbook refers to important study by J. Vernon Henderson, Henderson’s study demonstrates that agglomeration economies exist and argues that localization economies are far more important than urbanization economies. However, more recent evidence complicates this picture. This table is one example. O’hUallachain and Satterthwaite (1992) find that in many services (including computer and data processing) both urbanization and localization economies are important; in most of manufacturing and wholesale trade-- only localization economies are important. This is also true for legal services, engineering and architectural services, accounting and auditing services. Communications, advertising, hospitals, health and allied services are industries where only urbanization economies appear to be important.
Furthermore, Moomaw finds that urbanization economies may have grown in importance while localization economies have declined.
Source: O’hUallacháin,

7. Economic Growth and Cities
Jane Jacobs -- Parable of New Obsidian; Cites are source of innovative activity; Emphasis on knowledge spillovers between industries and the value of diversity. Diversity important.
Glaeser, Kallal, Sheinkman and Shleifer cite two other theories
Marshall-Arrow-Romer emphasize within industry spillovers and argue that concentration is good for growth.
Porter emphasizes within industry spillovers,but argues in favor of atomistic competition
Agglomerative economies provide a rationale for clusters of industries, but also form a basis of theories of economic growth.
New Obsidian -- (1) Hunter gatherer society with access to a widely prized scarce natural resource -- obsidian; (2) HG wants to prevent rival tribes from encroaching on its hunting grounds so it arranges to trade obsidian first with a nearby tribe and that tribe then trades with others; (3) settlement of second tribe becomes a trading center. Population g rows with work associated with trading; (4) Traders come from other places and bring goods to trade for obsidian. (5) hide bags manufactured to carry obsidian. (6) Traders bring seeds from different regions. Hybrids appear. (7) New Obsidian begins to grow an dcultivate its own food. Local production grows (8) Agricultural work begins to move out of city because of need for space - particularly for animal husbandry. Jacobs argues that urban development may have proceeded rural settlements.

8. Findings from Glaeser et al, 1992
Industry employment growth is smaller in cities where an industry is over-represented.
Industries grow faster in cities with smaller than average firms.
Industries grow faster in cities that have a diversity of industries.
These findings tend to support the Jacob theory more so than the MAR model. Mixed results on Porter. These results also support the importance of urbanization economies.

9. Are Cities Dying?
Moomaw (1986) concludes that localization economies have declined in importance. Urbanization economies may have increased in importance.
What is likely impact of advancements in telecommunication and information technology?
Disadvantages of cities -- congestion, pollution, crime, poverty
Telecommunications and information technology reduce transactions costs and communication costs and may reduce need for producers to be located close to supplier of inputs.
Product life cycle argument says that agglomeration economies may be most important early in a product’s life cycle. The statistical economies are greater. The advantages of labor pooling are great. Firms are small relative to minimum efficient scale for inputs etc. This argues for clustering of sectors that are technology intensive -- an increase in urbanization economies.
Urbanization economies may become more important with emphasis on cultural activities etc -- Joel Kotkin.