Economics of the metropolitan area 212G, Spring 2013

1. Economics of the metropolitan area212G, Spring 2013 Professor: Keren Mertens Horn Office: Wheatley 5-78B Office Hours: TR 2:30-4:00 pm E-mail: Keren.horn@umb.edu

2. Recap: Economic Concepts • ELASTICITY: % ∆ Qs / % ∆ P • Supply is elastic if a small percent change in price causes a big percentage change in the quantity supplied • Supply is inelastic if a big percentage change in price causes a small percentage change in the quantity supplied • MONOCENTRIC CITY MODEL • Model of a city in which all production is concentrated in one location and all workers commute to that location from outlying houses

3. Land Rents with Many Classes of People Rent Rent Kilometers in other direction Kilometers in one direction Downtown Crossing

4. Recap: Economic Concepts • ELASTICITY: % ∆ Qs / % ∆ P • Supply is elastic if a small percent change in price causes a big percentage change in the quantity supplied • Supply is inelastic if a big percentage change in price causes a small percentage change in the quantity supplied • MONOCENTRIC CITY MODEL • Model of a city in which all production is concentrated in one location and all workers commute to that location from outlying houses. • FACTOR SUBSTITUTION • Shifting input proportions as input prices change • DEAD WEIGHT LOSS • The fall in total surplus that results from a market distortion such as a tax • No Dead Weight Loss associated with a tax on land!

5. Patterns of urban growth in US cities • JOBS: • Portion of MSA employment in central cities is falling • 70% of MSA jobs in central cities in 1950 • 53% of MSA jobs in central cities in 1980 • 42% of MSA jobs in central cities in 2000 • New York City 86% of jobs in Central City in 2000 • Boston 24% of jobs in Central City in 2000 • Shows cities are becoming less monocentric • PEOPLE: • In US MSAs an average of 20% of people live within 3 miles of the Central Business District • Share of people living in central cities continues to decline • In 1900 77% of MSA residents lived in central cities • In 1990 40% of MSA residents lives in central cities • In 2000 28% of MSA residents live in central cities • New York City 37% of population in central city • Boston 10% of population in central city

6. City/suburban population growth

7. Differences in rates of suburbanization • Not all groups have suburbanized at the same rates: • 72% of MSA Non-Hispanic White households live in suburbs • 66% of MSA Asians live in suburbs • 49% of MSA Hispanic households live in suburbs • 36% of MSA Black households live in suburbs • Why do we think this is the case? • Income differences? • Different preferences? • Social networks? • Discrimination?

8. International comparisons • Have cities in the rest of the world followed a similar pattern? • Comparison: Tokyo vs. NYC • About same land area • 29 million people in Tokyo vs. 16 million in NYC • 6,000 residents per sq mile in Tokyo vs. 2,900 in NYC • Comparison: Barcelona vs. Atlanta • About same population (2.5 million) • Barcelona covers 162 sq km • Atlanta covers 4,280 sq km • People consume more land per person in the US

9. Suburbanization or sprawl? • People who call it suburbanization believe: • That low density development outside the central city is a form of urban growth, not a cause for alarm. • That people have made optimal decisions about their residential preferences, their employment and their commutes. • People who call it sprawl believe: • That poorly planned cities are expanding at unprecedented rates. • That Americans would be better off if they lived closer together, worked closer together, and used more mass transit. • Who is right? • If low density is causing cities to lose out on the economies of scale that arise through agglomeration economies, then maybe this low density development is an efficiency loss? • Or maybe American preferences demand this type of low density living and we would all be worse off trying to fit into a more dense urban model?

10. Causes of suburbanization (or Sprawl) • Mieszkowski and Mills (1993) separate causes into two buckets: • Natural Evolution • Emphasizes changes in transportation technology and demand for new housing • “Flight from Blight” • Emphasizes migration of high-income households to avoid fiscal and social problems of central city

11. Natural evolution theory • Density of US cities has been slowly decreasing since about 1820 • Improvements in transportation have made it easier for households to live farther from the urban core • Beginning with streetcars, commuter railroads and the automobile • Rising real incomes over time have led to greater housing consumption • BUT increase in income pulls in two directions: • Higher income households demand more housing • AND higher income households face higher transportation costs • Unclear that higher income should lead to more suburbanization • Other improvements have made suburban living more appealing • Frozen Food • Television

12. “Flight from blight” • Idea is that government policies have done a worse job than they should have in promoting health, safety and welfare of people in older, more central parts of metropolitan areas. • As a result people with resources have moved to sparsely populated suburbs in greater numbers than they should have. • Ex/Because crime is high in the urban core people flee from them and build homes in safer, more secluded areas • Ex/Because of concern that urban schools will not provide high quality education, households with resources move to suburbs with ‘better’ schools

13. government policies • Which government policies could be leading to ‘excess’ suburbanization or sprawl? • Transportation policies • Subsidizing driving and underfunding mass transit • Not charging full price of infrastructure • Subsidizing sewers and power lines in less dense areas • Housing policies • Subsidizing homeownership • Mortgage interest deduction • Fragmentation of local governments also often blamed for causing excess suburbanization • Public services are funded locally (Ex/Brookline has its own public school system)

14. Policy responses • Regulation? • When is regulation preferable to taxes? • Ex/When we have health and safety concerns • Will talk next week about zoning in detail • Problem – “blunt instrument” • Change decision making unit? • How would this help? • Move decision maker from local actor to regional actor, will be able to see regional nature of problem

15. Policy responses • Coasian Bargaining • CoaseTheorem -- the proposition that if private parties can bargain without cost over the allocation of resources, they can solve the problem of externalities on their own • Ex/Pesticides from farmers’ land ends up in nearby river • Problem-No one is keeping this water clean because no one has rights to the river • Solution-If we assign property rights to nearby water treatment facility they now have an incentive to keep the water clean. They can make then bargain with the farmer. • They will ask the farmer to pay some cost greater than the cost of cleaning the water • The farmer will be willing to pay up to the amount it would cost him to switch to a pesticide-free fertilizer • Challenge – collective action problem

16. Policy responses • Taxes/Subsidies? • Charge people the full costs of developments • Allow them to move to low-density areas but make them pay their full way • Challenge – hard to get the price right • But these types of market solutions are generally preferred by economists

17. Examples of Pricing responses • Charging a development tax on each acre of land converted from agriculture to urban use • If price is right then would be a Pigouvian Tax • Where tax exactly the social costs imposed • Problem – how do we account for the value of open land? • What is the dollar value associated with undeveloped land? • Do we care differently about land in the periphery vs. land in the center of the city? • Impact Fees to account for infrastructure costs of new development • Impact Fee – landowner charged full costs of extending infrastructure to new land • Downsides? • Who pays for this fee? (ie which actor will have a more elastic response housing consumers or developers) • How do we know true costs of adding a new house?

18. Change is hard • Very difficult to increase density! • Ex/Atlanta – built up area would need to shrink by 67% in the next 20 years to reach a population density feasible for public transit (30 persons per hectare)

19. Rest of semester • Zoning-Governments primary tool to regulate land use • Water, Sewers, Fire and Garbage-Most well known public health services city governments provide • Urban Education-Why is it so hard to create high quality urban public schools? • Race and Space-Why are cities are often segregated by race? • Housing in cities-What (if any) is the government’s role here? • Crime-What can we do to make city living safer? • Economic Development-Is there a role for governments in attracting jobs to urban areas?

20. Topics for final project • Congestion Pricing (Debate on implementing congestion pricing in Boston) • Bus rapid transit (Debate on improving mass transit with bus rapid transit vs. trains) • Education Reform (Debate on redistricting Boston’s public schools) • Housing and poverty (Does government have a role in provision of affordable housing?) • Homelessness (Debate on whether homelessness is a housing problem) • Crime Fighting (Debate on ‘stop and frisk’ as an urban crime fighting strategy) • Gun control (Debate on city’s role in gun control) • Building Stadiums (Debate on building a new sports stadium in Boston)