PASCUBILLO, J. YASSER D.

ECON 198

BASS ECONOMICS – IV May 22, 2017

1. According to the empirical studies, what effect do state and local taxes and public services
have on location choices?

The determinants of location choices of both households and firms alike tend to gravitate
towards weighing of opportunity costs of foregoing a location. Household and firms may
think that the benefits of the location in which they are situated are too good to pass up so
they tend to hold on to it and refuse to relocate. Or perhaps, other location sites possess
more welfare for households and are more profitable for firms, inciting households to move
and firms choosing the aforementioned sites as the next branch holders. Two of the main
driving force of raising opportunity costs are taxation and public services.

A study conducted by Rathelot (2008) of University of Warwick investigated the impact

of local taxation on creation of businesses in a given municipality. Using a Poisson model
to explain the numbers, the study found out that, higher local taxes tend to deter firms from
setting up in a given zone (Rathelot & Sillard, 2008). A higher corporate tax reduces the
income of a business corporation because firms are obliged to give up a bigger portion of
their income. However, a higher tax could also mean that that certain location is profitable
(hence the taking advantage of the government).

On the other hand, the utility maximization theory plays a vital role in explaining location
choices of households. This economic theory suggests that people tend to minimize their
commuting costs by selecting a housing location which provides greater accessibility to
their workplace, alternatively they may accept increased commuting costs in exchange for
less expensive housing further from employment (Alonso, 1964). This accentuate the
importance of providing better roads and effective transportation system in a city. Should
the government provides the public services mentioned, individuals will be encouraged to
either move away from the city center to reduce rent, or hold on to their dwellings in the
outskirts.
 Furthermore, a study conducted by Ozturk and Irwin (2001) found out that school quality
and crime rates are both important factors that determine location decisions of households
(Ozturk & Irwin, 2001). Establishing police control and improving education system can
influence residential location choices of individuals.

2. (a) Define urbanization economies.

Urbanization economies is defined as the agglomeration of economies from different

industries. This crosses industry boundaries and causes firms of different specialization to
locate close to each other. This results to a development of large, and diverse cities
(O'Sullivan, 2012).

Urbanization economies generates higher productivity through the benefits of

agglomeration economies such as input sharing, labor pooling, skill matching, and
knowledge spillovers. Advantages associated with this are better employment
opportunities for households, better learning environment for workers, and better social
opportunities (O'Sullivan, 2012).

(b) How do urbanization economies differ from localization economies?

Whereas urbanization economies refer to firms from different industries clustering

together, localization economies, on the other hand, are those in which firms of the same
industries localize together due to the benefits of being closely located together. The major
benefits of localization include the concept of labor pooling, and knowledge spillovers
(O'Sullivan, 2012).

(c) Discuss 3 different examples of urbanization economies.

An example of urbanization economies in action is labor matching. Since there are different
there are different industries which requires different skill set, individuals living in the
vicinity have a wide array of jobs to choose from. They can choose the best jobs that they
think suit perfectly with their skills and passion.

Another example of urbanization economies is the presence of malls. Although the stores
in malls may be unrelated, being located together not only allows them to save capital by
using the same infrastructure, but also gives the consumers the convenience of having all
the needs and wants in a single place.

Third example is the clustering of corporations to share advertising firms. Given the large
economies of scale of producing advertising campaigns, they can save money by
employing an advertising firm that specialize in such business.