Real estate economics 156

Agglomeration:

an extended city or town area comprising the built-up area of a central place

and suburbs or adjacent satellite towns.

Clustering due to politics rather than real cost advantages is spurious agglomeration.

When a country restricts trade, its capital city may grow due to artificial agglomeration.

Localization economies of scale come from being near related firms.

Urbanization economies of scale come from the city.

Firms are in cities to economize on transportation costs.

Also, cities offer specialized services and amenities.

There is specialized labor and capital goods.

The core-periphery model features

a concentration of economic activity in one place, surrounded by less intense activity.

Small changes in variables can lead to large changes in outcomes.

E.g. a small change in fixed costs of production can increase the range of optimal firm locations.

So cities can change in status.

Labor market pooling.

The gain in being near other firms due to a labor pool to draw from when production increases.

Country boundaries limit mobility and add to costs.

They are discontinuities in factor markets.

Gravity model: trade varies inversely with distance and directly with the size of an economy.

If there were no boundary,

Ontario would be shipping 40% if its output to the US, but it only ships 19%.

European countries have been less specialized than regions of the US. e.g. automobiles.

Metropolitan Growth

A major source of urban growth is the local production of goods which were previously imported. Import substitution can be natural or artificial (by policy).

Local production then becomes a source of exports.

About 1/4 of the new jobs from urban growth goes to residents

and 3/4 to immigrants from other cities.

Taxes and business location

Regulations act like taxes and are substitutes for taxes.

When capital is taxed, capital owners require a higher pre-tax return.

Capital will flee to other locations.

Enterprise zones.

Used in 37 states and DC.

Reduce regulations and taxes, plus some subsidies.

Studies have found no evidence that enterprise zones have increased employment.

Some of the new activity is substitution from other locations.

Benefits - externalities - are capitalized into higher land prices.

Like the bridge in London where tolls were eliminated.

So a firm renting land may not benefit at all.

Infrastructure - government capital goods.

Highways, streets, bridges, pipes, dams

Reducing congestion yields higher benefits than building new freeways.