Lec-2 Economics of Cities

1. Engr. Dr. Attaullah Shah Lec-2 Economics of Cities

2. Contents • History of Cities • Monocentric Cities • Extension of monocentric cities • Urban densities • Theories of Urban growth • Central place theory • Urban Hierarchies • Economic base theory • Case study of Peshawar: • Urban displacement and Vulnerability in Peshawar city

3. 6 major themes of urban economics according to Arthur O’Sullivan is divided into six related : • Market forces in the development of cities • Land use within cities, • Urban transportation, • Urban problems and public policy, • Housing and public policy • Local government expenditures and taxes.

4. Why Study Urban Economics • Understand how cities grow • Why, when and how • “real estate” typically refers to urban, not rural land • Understand what types of real estate are needed given the patterns of growth and the economics forces driving that growth • Determine what land is worth in unique locations in an urban setting • Land value is a function of a city’s growth patterns • Location of land – and its zoning and perceived value to end users – determine its value over time • Urban economics identifies land value as the determining factor for new development

5. Origin of the World First Cities • The city of Jericho in the Jordan Valley in 8th Millennium BC • With 2000 population, the city had accumulated wealth and was targeted by raiders. • One Millennium later Catal Huyuk developed in Turkey with 5000 people and served as regional trade centre • Uruk was developed in southern Mesopotamia ( Now Iraq) having a population of 50000 in the second half of millennium • Archeological remains are the sources of study of economy of such cities. • The relics have shown city walls, buildings, household, implements, tools and craft fabrication and religious objects • It is not easy to derive meaningful information about the economy and other important aspects of their lives from these remains. • Due to limited information many questions still remain and the future excavation may solve some of these

6. Conditions for Urbanization • Initially it was believed that agriculture surplus has led to creation of the cities but later it was argued that it is not enough for developing cities alone. • For cities to develop the economic benefits must offset the costs • The role of trade and development due to obvious economy of scale • The concentration of workers in a single enterprise if there are internal scale economies • The learning and innovations by physical proximity of producers will generate cities • The citizens will consume public goods and their close proximity will generate cities ( Religion or Defense) • “

7. Localization and Urbanization • Cities may grow due to agglomeration economies: • Concentration of industry ( Localization economy). The example of Silicon Valley • Size of the city ( Urbanization Economy). For example several hundred miles to the south of America Los Angeles, where there is no dominant industry • The study of localization and urbanization economies is not simple due to lack of proper data about the various important aspects of the data.

8. Economic Model of a City • Assume a circular city and all employment at Central Business District (CBD) and having N identical individuals • Each individual makes one trip each day to CBD and earns wage of “Y”. The greater the radial distance from Centre, more will be the commuting cost • For an individual living at distance x, the daily commuting cost is tx, which is out of pocket cost rather than time cost • If the utility function of the individual is v(q,c), where q is the consumption of services of housing and c is consumption of services of other goods. • The rental value paid by individual living at x for housing is p(x), which will depend on the nature of house, its accommodation , floor areas etc. The utility function of individual will be • There are three aspects of problem, choice of location, consumption on housing and goods

9. If the location of the individual is denoted by x with corresponding housing value of q and consumption of houses and goods by c, then the budget line is shown in Fig.1 • The indifference curve between choice of location having same utility function is denoted by concave curve • The equilibrium would lie at the point where indifference curve touches the budget or net income line i.e. co and qo • IF the net income decreases, due to reduction in distance from x1 to xo, new equibrium is obtained at eo

10. Properties of housing consumption and location curve

11. Extensions of Monocentric city Model • Variety of interesting features have been added to the model: • Different income groups: Do individuals with high income would prefer to live closer or farther from CBD. The answer is farther. Why? • Traffic congestions: How commuting should be priced and how land should be allocated to congestion reducing road capacity • Modal access and non radial access costs: The city tends to develop along its radial roads and the rural urban boundary has to be non radial • Fully closed city: Unlike the monocentric model, the city aggregate land rents are also sources of income to the city residents.

12. Cities are changing • Employers are more dispersed on the metropolitan area. • In the US, CBD concentrates 20% of total employment in MA • In the US, CBD concentrates 40% of total offices in MA • Population (20% in 3 miles around CBD) and commuting

13. Urban density • Varies a lot across countries and cities in the US • Density gradient: Rate at which population decreases with distance density • For example, 0.1 means the density decreases by 10% per mile from center. • In average the density gradient in the US goes from 0.05 to 0.15 • What can be the figure for Pakistan

17. Identify some centers in Peshawar city based on the uses?

18. The rise of monocentric • Improve in transportation technology • Rule of thumb: “Radius of a city is the distance that can be traveled in one hour” • Hub and spoke public transit system in the 19th Century • Before elevators, price of high floors were cheaper because they were rented at a discount that offset the costs of climbing Short CBDs four or five floors of stairs.

19. The decline of monocentric cities. • Decentralization of manufacturing • Intercity tucks. Trade off of moving away from center is between higher freight costs and lower wage. • Since freight costs decrease, it’s better to move out from centers • From factories close to ports, railroads and city centers to factories close to highways, beltways and airports centers. • Decentralization of offices • Advance of communications (a reduction in the need for face2face activities) • Decentralization of population • Evidence: Reduction in density gradients • Rising income and change in consumption bundles (not clear) • Decrease in commuting costs- “Jobs follow workers to suburbs and workers follow jobs to Suburbs” • Others: Old housing at the center, high taxes, crime, low quality education, etc.

20. Theories of Urban Growth • Essentially all are part of “location theory” → all forms of services and economic activity will find their optimal location • Central place theory • Development around a business, civic, religious core • Ancient cities of Greece and Italy • Driven by transportation –or lack thereof – and the need/ability to reach your customer audience • Axial theory • Development along topographical and/or transportation features • Cities along GT road • Concentric circle theory – a variation on central place theory • Development of the CBD • Concentric development of other, suburban nodes • “urban sprawl” and “edge cities”

21. Central Place Theory and the System of Cities • The “Big Picture” of cities… • Why cities form, grow, & decline • What are the centralizing & decentralizing forces that explain the number and sizes of cities • What is a "system" of cities, and the essential characteristics of the US system of cities • The key practical insights and principles of central place theory and urban hierarchy theory, and how real estate decision makers can use these • What is meant by the economic base and export base of a city • Employment & population multipliers

22. Central Place Theory and the System of Cities • “Central Place Theory” • “Urban Hierarchy” • “Economic Base”

23. The Pattern of City Size • Cities are not isolated phenomena. • Each city is part of a “system” of cities. • Each city has a place and role as an element in this system.

24. Example: • A high-rise, upscale apartment building can make lots of money in Islamabad and Lahore. • The same building would probably lose lots of money in Mardan and Nowshera-Why?

25. The “Rank/Size Rule”(aka “Zipf’s Law”) • Essentially, it’s pure Mathematics… • - Suppose all cities grow at random rates over time. • Suppose all cities tend to grow at the same average rate. • Suppose all cities have the same “volatility” in their growth rates. •  Then the “Zipf’s Law” rank/size pattern will result. But why would all cities tend to grow at the same average rate?…

26. Theoretical picture:

27. Actual sizes & ranks of European cities…

28. Why would all cities have the same volatility of growth? • Once a certain size, cities tend to have diversified economic bases. • Smaller towns do not have diversified economies, so they experience more volatility, causing many to “die out”. • So there are fewer small towns than Zipf’s Law would predict.

29. What this math cannot explain is: •      Why do cities change rank so rarely?… •      Rank changes tend to be systematic, not random (e.g., southern & western cities tend to move up in rank, eastern cities move down.To understand the size pattern of cities, we must also consider location . . .

30. The Pattern of City Location • Look at a map of city size & location in the Pakistan. • Some cities and locations are more attractive • Geographical “Zones of Influence”

31. Factors underlying the pattern: • The “Rank/Size Rule”, & the Geographical “Zones of Influence”  • i Centralizing city-causation ("centripital") forces are counter-balanced by opposing "decentralizing" ("centrifugal") forces. • ii The relative strength of the centralizing and decentralizing forces differs for different functions and activities. • Can you give some examples from your city?

32. Centripetal Forces: In political geography: • Centripetal forces are those forces that bind a country together. • The unifying factors such as language and religion that give people a shared, positive vision of what their country is all about. • Things like a strong sense of shared history and values and a shared language. • Centripetal forces can be reinforced by a threat of foreign aggression. • This has always been very effective in unifying a population. Would lead to fewer, larger cities…

33. 1. Economies of Scale • Cheaper per unit to produce more stuff at one place. • i.e., Declining average costs with larger production capacity. • Due to “fixed” costs. • Example: Auto factory with 200,000 cars/yr production capacity is more efficient than auto factory with 50,000 cars/yr capacity.

34. 2. Economies of Agglomeration • Productivity advantage of physical clustering. • Vertical & horizontal production linkages (synergy, critical mass). • Example: Silicon Valley.

35. 3) Positive Locational Externalities • One firm benefits another firm nearby. • Example: Trucking firm & Airfreight firm hub. • “Growth Spirals”, “Cumulative Causation”…

36. Centrifugal Forces • Decentralizing forces that put a break on urban agglomeration, result in a larger number of smaller cities. • Congestion • Pollution • Crime • High intra-urban transportation costs • High rents & urban land costs • High inter-urban transportation costs (with greater distance between fewer larger cities)

37. The Balance of Centripetal & Centrifugal Forces… • Centralizing forces are relatively stronger in comparison with decentralizing forces for some types of activities than for others… • National Government functions?… • International financial services?… • Corporate headquarters?… • Corporate research facilities?… • Light manufacturing?… • Distribution?… • Corporate branch offices, sales offices?…

38. Central Place Theory & Urban Hierarchy Central Place Theory (CPT)… Suppose “everyone” (13 people) lived on a 12-inch ruler… In order to reduce 'spatial friction', places of similar size, rank, or function will tend to be EVENLY SPACED across geographical space and/or population.

39. A central place…. • A central place is a settlement that provides goods and services • This could be a village, conurbation or city. • This forms a hierarchy

40. No. of services provided Capital High order Cities Large Towns Middle Order Small towns Village Hamlet Low order Settlement population size

41. Assumptions • The larger the settlement the fewer in number there will be • The larger the settlement grows in size the further apart they will be • As a settlement increases in size so to will the number of functions increase • As a settlement increases in size the number of high order services will increase

42. Range and threshold • Central place functions are activities that market goods and services from central places for the benefit of local customers and clients drawn from a wider hinterland • Range is the max distance people are prepared to travel to obtain a good • Threshold minimum number of people needed to support it

43. Christaller’s model of Central Places • Walter Christaller • German • 1933 published a book to demonstrate a sense of order in the spacing and function of settlements • It was based on Southern Germany

44. Central place theory • Aims to explain the spatial organisation of settlements and their hinterlands. • Theory based on assumption that there was some sort of order in the pattern and function of settlements

45. Assumptions • Flat land between settlements so that transport was easy and cheap in all directions • Population was equal • Resources were evenly distributed • Goods and services were obtained from the nearest central place so as to minimise distance travelled • All customers had the same income and made similar demands for goods

46. Assumptions (cont) • Some central places had only low order goods for which people were not prepared to travel far so had a small sphere of influence • For high order goods people were prepared to travel for • No excess profit would be made by 1 central place and each would locate a far as possible from a rival to max profit

47. Shapes for the theory • The ideal shape for a sphere of influence would be circular All the distances to the edge of the circle would be equal Central place Boundary of trade areas

48. When you start to introduce other central places Places in between are not served by any central place

49. Circles with no gaps Problem now: areas served by more than one place- this goes against the basic principles of the model

50. Best shape…hexagons