class: center, middle, inverse, title-slide # Econ 414 - Urban Economics ## Why cities? ### Marcelino Guerra ### February 2, 2021 --- # Why do cities exist? <br/> * There are different explanations (e.g., defense, social interaction) * Big question in Urban Economics: What economic forces cause that spatial concentration? - The economic approach to cities focus on the location of employment and firms -- * There are forces of attraction that cause jobs to be concentrated over space, and people tend to locate near to their worksites - The result is a city. How big? * Agglomeration Forces - Reduced costs of moving goods across space - Labor market pooling - The Flow of ideas/Knowledge spillover --- class: inverse,center, middle # Clusters of Industries in the US --- # Resource-oriented firms <iframe src="maps/oil_gas.html" style="width: 1200px; height: 500px; border: 5px" alt=""> --- # Market-oriented firms <iframe src="maps/fin.html" style="width: 1200px; height: 500px; border: 5px" alt=""> --- class: inverse,center, middle # Forces of Attraction --- # Scale Economies <br/> * With scale economies, firms become more efficient as they grow in size - the average cost of production decreases as output increases - Indivisible inputs - Factor specialization * Scale economies thus favor the formation of large factories (e.g., auto plant) -- * That can explain "company towns". The large factory will create a concentration of employment, and these workers and their families will attract other business to serve their needs (grocery stores, health centers, etc.) * However, this is not enough to generate large cities such as New York or Chicago. --- # Agglomeration Forces <br/> * Agglomeration economies happen when productivity rises with density - Firms and workers benefit from being close to others * Can be either pecuniary or technological - Pecuniary economies make some inputs cheaper in **large cities compared to small cities** - Technological economies make inputs more productive in **large cities compared to small cities** * **Why does Walmart like San Francisco?** --- # Thicker Markets <br/> * Easier match between employer and employee - Lower unemployment duration - "Power couples" * Lower cost of hiring specialized labor * Venture capitalists -- * Cost of inputs supplied by other firms * Shipping costs (Scale Economies vs. Transportation Costs) --- # Knowledge spillover <br/> * High-tech firms want to be close to the action. What does that mean? -- * While engineers within a given firm collaborate intensively and share ideas, spillovers would arise when workers from different firms get in touch -- * Social interaction among creative workers tend to generate learning opportunities that enhance innovation and productivity (new technologies and business practices) * Home bias of patent citations * Brain drain * Economies of scale and Self-reinforcing effects --- # The Consumer City * The simplistic point of view dictates that cities offer positive agglomeration benefits and therefore are useful for production, **but bad for consumption** -- * However, **urban success is increasingly driven by consumption**, not production - More and more people decide to move based on the quality of life that the city can offer, even if that means lower wages/higher housing costs - Weather is an important determinant of population and housing price growth across US counties -- * Cities are centers of consumption since dwellers share the fixed costs of supporting a variety of entertainment options - Museums, restaurants, theaters, etc. are hard to transport and are, therefore, local goods * Urban life downsides: commuting time, crime, pollution - Urban policy to promote efficiency