UE – Summary

Residential Location Theory

- distance decay functions: density and rent (generally decline with distance to the
CBD)
- location of income classes: people of like income tend to live next to each other;
poorer live near city center (where rents are high) and the rich and periphery

Von Thunen Model

- rent: land rent is the price of land services over a certain period
- crops where grown in well-defined bands around the center (not due to fertility
differences)
- model considers: cost of production, price of good, transport costs
-  crops with the higher bid rent curve will capture the land use
-  the steeper rent curves capture the central locations

Production Model
- land, capital, labor
- substitution of capital for land
-  the higher and steeper bid rent curve will capture the location

Consumer Model
- other goods vs. space
- lower brc represents greater utility (brc that gives zero profit): for consumer it will be
the lowest one that is compatible for the supply and demand for land being equal
- total amount of land in the city equals the demand
- individual will consume more space the further he lives from the CBD
- lower density the further from the center

Residential Sector Model

- consumers have same preferences but different incomes
- income elasticity for demand of housing >1: rich people locate at the periphery
where land is cheaper
- but: rich value time more  brings them back to city center (in order to reduce
commuting time); disutility of commuting is fraction of wage (same for both)

Land Rent & Market Demand

- import restrictions of corn  supply of domestically produced corn increased but
also its price  land supply inelastic  demand for land increased  land rents
increased
-  price of land is high because the demand for corn is high

Intervention in land market

- intervention by local authority to control size of the population
- green belt
- refusing to supply main services outside a given area
Land use controls
- zoning: physically segregate different types of activities
o nuisance zoning: only moves pollution around
o traditional zoning: zoning map
o performance zoning: standards for each zone (compromise of traditional
zoning and spatial effluent fees)
o fiscal zoning: exclude low-income households which are a fiscal burden
o inclusionary zoning: developer is required to build a certain proportion of new
houses for low-income families
o open-space zoning:
- spatial effluent fees: tax on pollution (firms choose their own location minimizing the
production costs; they have to pay for pollution; but: difficult to measure an
adequate fee)

Lecture 4: Theory of the determination of the Price and Supply of land

- Neoclassical model (NUE)
o unrealistic assumptions: perfectly competetive markets, maximizing utility, no
costs of searching for housing, land is homogeneous, no differences in quality
of housing stocks
o suburban employers can offer lower wages than CBD employers because
suburban job requires less commuting cost
o trade-off between housing expenditures and transport costs (Y = G+H+S+T 
H = (Y-G-S)-T )
o land market works smoothly with the best use (most profitable), capturing a
site through its ability to bid more for it than other alternative
- market failiure:
o planning controls (zoning)
o speculation
o ownership
o redevelopement

Lecture 5: Optimal City Size

- cities exist because it is efficient to produce goods on a large scale due to
specialization
- comparative advantages generate trade, as well as scale economies in transportation
- equal productivity, no economies of scale in production, no economies in
transportation  no need for a city
- limits to city size:
o freight cost/railroad: more fully exploit economies of scale  city increases
o scale economies in production
o commuting cost: wages increase
- big/small cities
o localization economies/industry clusters: sharing input, pool of labour,
information
o incubation process: knowledge spillover
o localization economies:
o urbanization economies:
 o agglomeration economies in marketing: sales of one store affected by other
o innovations in telecommunication

Lecture 6: Distribution of City Sizes

- Central Place Model:
o explains the existence of urban hierarchy in terms of hierarchy of markets;
o the larger the city, the wider the range of goods & services
o hexagonal market area (minimizes travelling costs while ensuring all market is
covered)
o range: maximum sales distance
o ignores natural location advantages
o essentially built on rural base
- Rank Size Rule: the n city has the size of 1/n of the population of the biggest city (as
long as the biggest is not a primate city); but: no consideration of the area from
which the cities are taken (might hold for a region but not for an entire country)
- urban hierarchy
o each city is a coalition of firms that each firm can join

Lecture 7: Virtuous and Vicious Circles

-

Lecture 8: Aggloremation
- internal economies of scale: decrease in average costs due to an increase in the
production level of the firm itself
- external economies of scale: average costs are a function of the level of output of the
local industry as a whole
- externalities: neighbourhood effects; interdependence of utility, production or profit
functions
- technological externalities: well-being of a consumer or the production possibilities
of a firm are directly affected by the action of another agent in the economy (Fisher
vs. Oil refinery; knowledge spillover between firms within an industry
- pecuniary externalities: affects firms demand & profit functions through changes in
prices
- The monopolistically competitive industry is one in which there are a large number
of firms producing ‘similar’ but NOT identical products ( product differentiation
gives firms an element of monopoly power)

Lecture 9: Empirical Evidence of Agglomeration

- localisation economies: firms from same industry benefit from being located in the
same area (in smaller cities)
- urbanization economies: firms from different industries benefit from being in the
same are (in large cities)

Lecture 10: City Growth and Decline

-
Lecture 11: Neighborhood Choice and Segregation
- commuting costs as main determinant of location of household
- positive and negative externatilites resulting from living in a neighbourhood
- households compete for places in desirable areas by bidding for housing and land
- households are willing to pay a premium to live in low-crime neighbourhoods (crime
= costs; opportunity cost of lost work time, monetary loss due to burglary/theft, cost
of psychological/physical injuries)
- concentration of low-income and minority households in some areas leads to spatial
mismatch (means that there is no job near to the people that live there)

Lecture 12: Cities and Education

- cities can provide a great number and variety of services due to increasing returns to
scale (e.g. education)
- benefits of education (also positive externalities)
o schooling increases the salary earned
o increases life expectancy
o improves other health outcomes
o private benefits bring social benefits too (lower healthcare costs, lower crime
rates, parents can work  pay more taxes)
o peer group effect
o more productive, healthy, and pay higher taxes
- difficulties
o education is subject to increasing returns to scale
o congestion externalities (disruptive/slow down, individual attention, different
optimal learning styles  can affect learning outcomes)
- class size
o smaller class sizes may allow teachers to concentrate on other goals
- advantage of cities is that they provide greater variety of goods/services for
consumers
- willing to pay large rent premium to live close to a good public school (saves on travel
time and other costs)
- government will provide at least some education to all individuals at little or no costs
 increase consumption of education
- market failure
o monopolies (one local school)
o externalities (positive)
o observability (hard to measure)
- rules:
o number of compulsory hours,
o starting/finishing age
o basic curriculum
o banning child labor
- incentive problem:
o standardized testing: feel pressured to achieve good results
o school vouchers: incentives to school officials to work harder

Lecture 13: Crime and social problems

- cost of crime
 o increasing number of police officers
o increasing the opportunity cost of crime (better schooling)
- personal vs. property crimes
o young people in deprived neighborhoods
o urban residents with higher income
- equilibrium: intersection of marginal cost (upwards slope) and marginal benefit
(proceeds, downwards)
- shift marginal cost curve upwards ( reduce crime rate)
o by increasing the certainty of punishment  required proceed from crime are
now higher  number of crimes committed drops
o increase length of prison sentences
o increasing wage rate
o decrease unemployment
o education
- crime rates higher in bigger cities (greater proceeds possibility, lower probability of
arrest)
- socially efficient amount of crime
o marginal prevention cost decreases with number of crimes
o marginal cost of crime to victim is constant
o government should use more resources to prevent more serious crimes
- penalties should increase with victim cost of crime

Lecture 14: Transport and Congestion

- advantage of urban location  proximity to economic activity
- road space is limited  increasing number beyond certain point causes congestion
(social cost)
- costs (increase since more cars mean more external costs)
o private cost: each driver
o external cost: imposed by each additional car on others
o social cost: sum of both
o monetary cost of travel, time cost of traveling (opportunity cost)
- optimum: intersection of social cost and marginal benefit
- internalizing the externality  congestion tax  reduces the number of cars to the
optimum level by increasing private costs (drivers bear full costs)
- congestions tax
o  raises utility curve of a city
o increases demand for public transport/car sharing
o time of travel reduces (drivers switch to other times)
o travel route (drivers switch to alternative less congested routes)
- alternatives
o increase tax on petrol
o subsidize public transport
o increase cost of parking
- cars cause environmental externalities in form of air pollution & greenhouse gases
o  pollution tax
o direct approach (monitoring device)
o one-time pollution tax (lifetime, at car purchase)
o fuel tax
- cars cause accidents
o marginal cost of driving increases with speed (higher risk of death/injuries)
o marginal benefit of driving decreases with speed (diminishing returns to time
saved)
- speed and safty regulations  reduces risk of death/injuries at all speeds
o drivers compensate for lower risk costs by driving faster
o per mile tax  discriminating since risk of collision is higher for some
drivers/vehicles
- public transport systems are only cost-effective if the density is high
-