1 Land-use regulation [50 Points]

1.1 The political economy of UGB [20 points]

One can argue that the real motive for an urban growth boundary is not related to correct a market failure, but to artificially increase land prices. Now, suppose that the landowners in our hypothetical monocentric city can restrict \(\bar{x}\) to 40 miles (dashed vertical line in Figure 1.1).

i) Describe the process that drives the bid rent curve to shift upwards after implementing a UGB and its consequence (i.e., what is happening with prices, quantity of floor space, building-heights, and population density in between the movement from the old (“Developers old”) to the new bid-rent curve (“Developers new”) ).

ii) Suppose the developers’ bid-rent curve was \(r(x)=80-x\) before the UGB, but now it is \(r(x)=100-x\) - the old curve is the same as in HW #1, with the associated old \(\bar{x}\). Calculate the rent loss due to the urban land restriction as well as the land-rent gain. In other words, compute the area associated with the land-rent loss (hint: the area V in the lecture notes is now a triangle), and the area related to the land-rent gain (hint: the area S is a parallelogram). Does the UGB benefit the landlords?

Urban growth boundary

Figure 1.1: Urban growth boundary

1.2 Open space as an amenity [20 points]

Assume that people living in the city enjoy farmland benefits, but the landowner does not consider those \(b\) dollars generated by the open-space amenity. Therefore, this market failure makes the city’s size suboptimal - the urban land area is too big. Suppose that the optimal city edge’s size is indeed \(\bar{x}=40\), and the developers’ bid rent curve behaves just like in 1.1. What should be the \(b\) dollars tax on developed land rent charged to the landowner for the city to achieve its optimal size (i.e., to make \(\bar{x}=40\))?

1.3 Zoning: non-conforming uses [10 points]

One of the rationales behind zoning laws is to curb externalities. In this example, we will take a closer look at negative externalities generated by factories. Suppose the city is a rectangle composed of 10 lots (25x20). Factories occupy lots with shading lines, and the others represent the housing area. Without the noise and pollution generated by factories, every lot in this city would pay the same rent \(r\) to the landowner (that also includes the lots with factories). However, due to the presence of those negative externalities, residential lots adjacent to factories pays half of the rent \(r/2\). The spatial distribution of factories with and without zoning laws is displayed in Figure 1.2. How much (in %) is the negative externality reduced with the two factories located at the edge of the city, compared to the scenario without zoning laws? What is the increase in total rent received by the landowner in the presence of zoning, compared to no zoning?

Zoning and Externalities

Figure 1.2: Zoning and Externalities

2 Manufacturing sector & The great divergence [50 Points]

2.1 The decline of manufacturing jobs [20 points]

In this question, we want to take a closer look at the manufacturing sector in the U.S. economy. This data from FRED contains all employees in the NONFARM sector from 1939 to 2020 (column PAYEMS), and all employees in the manufacturing sector (MANEMP) in thousands of persons.

First, compute the ratio of MANEMP/PAYEMS and store that as a column named share. After that, construct two line plots with i) the share manufacturing jobs/Total jobs in the NONFARM sector and ii) the total number of manufacturing jobs from 1939 to 2020.

What do you see, and what can explain this trend?

2.2 The uneven effects of globalization [20 points]

You just got the big picture - manufacturing jobs are declining in the US. However, recent studies have shown that trade liberalization has an uneven effect on wages and employment across US labor markets. For labor-intensive industries/low-skilled manufacturing (e.g., toys, cheap clothes, affordable electronics, etc.), it is tough to compete in prices with foreign companies in developing nations, where wages and therefore production costs are low. To illustrate the issue, the map below shows the most vulnerable US areas to Chinese products. The data is relative to the 1990-2007 period. Also, you might want to take a look at the China Trade Shock website.

In that context, answer the following questions:

i) Is this vulnerability to Chinese imports randomly distributed over the US? Explain

ii) With the increase in imports of cheap products from developing countries, what is expected to happen with low-skilled jobs in those US areas that are based on labor-intensive industries?

iii) What is expected to happen with the entire labor market, knowing the indirect effects of manufacturing jobs on other sectors of the economy?

iv) What are those uneven effects of globalization on labor markets? Think about Apple outsourcing part of the production to foreign countries. What are the gains of that for the firm, for its workers, and consumers?

2.3 The great divergence [10 points]

Read the interview of Enrico Moretti. What is the great divergence? Explain to me like I’m 5.

xkcd 1364: Like I’m Five