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Revisiting Urban Economics

by Melanie Friedrichs

In writing about cities, I often recall a course I took with Nathaniel Baum-Snow, which drew upon "Lectures in Urban Economics" by Jan Bruekner. The three concepts outlined below are my biggest takeaways from the course. Many principles of urban economics seem like common sense oversimplified, but articulating them has helped me assess their value in illuminating the nature of cities.

Source: Melanie Friedrichs

1. Agglomeration Effects

"Agglomeration effects" is a fancy way of saying "two heads are better than one," or rather "many heads are better than a few." It’s also the primary economic explanation for the existence of cities.

There are two main types of agglomeration effects:
  • Pecuniary. Things are cheaper in cities. This is obviously untrue for rent, and many goods and services — like restaurant meals and boutique clothing — that fluctuate with demand. But it probably is true for shared resources like electricity, water and transportation.
  • Technological. People are more efficient in cites, possibly because they can learn more from the diversity of people around them or because they are able to find more suitable jobs. In a farm town, there aren’t as many options for employment, and you might not be good at the job that’s available to you, but in a city there are more choices and opportunities to find a good fit.

Barcelona is a classic example of a high-amenity city. Source: Corsi Spagnolo

2. The Indifference Principle

Economists spend a lot of time thinking about why people do what they do. Some employ an overarching framework based on the notion that, when all things are considered, people choose what makes them happier or just as happy as any other available choice. According to Steven Landsburg's indifference principle, individuals are impartial toward choices that yield equal utility. This corresponds with Adam Smith's theory that individuals choose what will make them happiest, and thus what will make society happiest overall, through more or less rational decisions.

Urban economists often refer to the indifference principle in explaining why people live where they live. They generally group the factors involved into three groups:
  • Rent. How much does it cost to live in a particular city?
  • Income. How much can you earn in a particular city?
  • Amenities. What is the city like? Examples of positive amenities include good weather, beautiful architecture, low crime, a waterfront and a lively music scene.
    The principle of indifference seems like common sense, but can be a powerful tool of analysis. It implies that changes in any one of the three factors above tend to influence the other two. If jobs decrease, people will move out of the city, and with less demand rent will fall. If the amenity value of a place increases, then people will move into a city, and with more demand rent will rise.

    Source: Alexiptoto

    3. The Monocentric City Model

    The monocentric model is a standard component of urban economics. In the monocentric world, there is one dominant place to work: the central business district (imagine downtown Manhattan).

    Source: Melanie Friedrichs

    Rent is highest closest to the central business district, decreasing as distance increases and the commute to the central business district gets longer and more annoying (in accordance with the indifference principle). When the amount of rent a central-business-district commuter is willing to pay is the same as the rent farmers are willing to pay for an acre of cropland, the city ends. (This is called the "urban fringe.") Consumers tend to pay higher rents per square foot closer to the central business district and lower rates farther away; that’s why the line for city rent is curved.

    Source: Melanie Friedrichs

    The monocentric model is a little out of date, however, as many cities have multiple centers and the Internet makes centralization of employment less important. But there are important lessons to be drawn from this model:
    • Cities are denser at the center. Did you need a model to tell you that? Probably not.
    • Transportation increases sprawl. Or, rather, faster transportation increases the convenience of commuting, increasing rent that central-business-district commuters are willing to pay, and thus increasing the area of developed land without a corresponding increase in population. For this one, at least for me, the model helped.
    These three concepts are some of the basic building blocks of urban economics. Together they are meant to shed light on why cities exist, what drives up rent in some areas and down in others, and why transportation fuels sprawl. Of course, all of these principles are substantially distorted by power relations, asymmetric information and other contingencies, so cities rarely, if ever, reflect an idealized urban economy. I think of them more as the structural beams of a skyscraper, which determine the basic shape of the building without determining the texture of daily life inside.

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