URBAN ECONOMICS

1. Transfer-oriented industrial firms

• Transportation cost is the dominant factor in the location decision

a. Assumptions

(1) Single output

(2) Single transferable input - all other inputs ubiquitous (available at all locations at the same price)

(3) Fixed factor proportions

(4) Fixed prices for inputs and outputs

• Firm maximizes profit by choosing location that minimizes total transportation cost

Total transportation cost = procurement cost + distribution cost

Procurement cost (PC) - cost of transporting raw materials from input source to factory

Distribution cost (DC) - cost of transporting firm's output from factory to consumers

• Lower procurement cost if location of factory is near input source, lower distribution cost if location of factory is near market

b. Resource-oriented firms

• Relatively high cost for transporting inputs => pull towards input source is relatively strong

Monetary weight = physical weight * transportation rate

PC = w_i * t_i * x

DC = w_o * t_o * (x_M - x)

w_i = weight of input

t_i = transportation rate for input

w_o = weight of output

t_o = transportation rate of output

x = distance from input source to factory

x_M = distance from input source to market

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• Firm locates near input source if monetary weight of inputs is greater than the monetary weight of outputs

w_i * t_i > w_o * t_o

• Resource-oriented activities:

(1) Weight-losing activities - weight of output less than weight of inputs

Ex. - Ore processors

(2) Other activities - cost of shipping inputs higher than cost of shipping output (bulky, perishable, fragile, hazardous)

Ex. - Cotton baling, canning

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c. Market-oriented firms

• Relatively high cost for transporting output => pull towards market is relatively strong

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• Firm locates near market if monetary weight of inputs is less than the monetary weight of outputs

w_i * t_i < w_o * t_o

• Market-oriented activities:

(1) Weight-gaining activities - weight of output more than weight of inputs (add ubiquitous inputs)

Ex. - Soft drinks, beer

(2) Other activities - cost of shipping outputs higher than cost of shipping input (bulky, perishable, fragile, hazardous)

Ex. - Automobile assembly, bakery, explosives

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d. Intermediate locations

• Intermediate locations not chosen because of scale economies in transportation (lower average shipping cost as distance traveled increases) => favors one long trip as opposed to two shorter ones

• Scale economies due to:

(1) Terminal costs (loading and unloading, paperwork) - average terminal costs decrease as distance increases

(2) Line-haul economies - lower cost modes used as distance increases (short haul => trucks, medium length => trains, long haul => ships)

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e. Principle of median location

• Suppose multiple input sources and/or markets

• Optimum location is the median transport location - location that splits the total monetary weight in half

(1) Multiple markets

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(2) Growth of large cities

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(3) Transshipment points

• Point where good is transferred from one transport mode to another

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• Other sources of employment and population:

- Salespeople and other intermediaries (e.g., wholesalers)

- Transportation firms (truckers, sailors, longshoremen, etc.)

- Business services (banking, insurance, accounting, etc.)

- Retailers

Ex. - New York, Chicago, San Francisco Bay area, Los Angeles

2. Firms oriented toward local inputs

• Local input - an input that cannot be efficiently transported from one location to another

a. Energy inputs

• Initial important energy inputs were water and coal

Ex. - New England, Pennsylvania

• Electricity reduced importance of energy consideration because it could be transported

• Important for energy-intensive industries - aluminum, fertilizer, cement

• Energy reliability concerns could adversely affect California economy

• Deregulation => less difference in electricity prices, less significance in location decision

b. Labor

(1) Transport costs vs. labor costs

(a) Transfer orientation

• Early cities formed by transfer oriented firms

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(b) Labor orientation

• Shift to input orientation as transportation costs decrease:

i) Innovations in transportation - railroads, trucks, shipping, airplanes

ii) Innovations in production - physical weight of inputs reduced, e.g., steel

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Ex. - Mexico, Asia

(2) Long run

• Workers can move between cities in the long run

• Most of the new jobs in cities are filled by those who relocate from other cities

(3) Natural amenities

• Good weather, clean environment

• Attracts workers, firms follow workers

• Income elastic => attracts high income workers, e.g., engineers, high tech workers

• Good schools, low crime, cultural activities also important

(4) Learning

• Contact between workers of different skill levels leads to learning by imitation

• Better learning opportunities attract workers who want to learn and firms who want to hire them

• Higher average education => better learning environment, more productivity

• Uneven distribution of human capital => cities with above-average education have larger productivity gains, attract more firms, have higher growth

(5) Wages and unions

• Elasticity of business activity with respect to wages = -1.0 to -2.0

• Unions increase wages, may affect productivity

• Studies find negative effects small

c. Local public services and taxes

(1) Taxes

• Higher taxes => slower growth, given equal level of services
  
  
  • Elasticity for intermetropolitan decisions = -0.10 to -0.60
  • Elasticity for intrametropolitan decisions = -1.0 to -3.0
    
• Manufacturers more sensitive than other firms - national market

• High taxes on capital attract labor-intensive industries

(2) Public services

• Infrastructure for firms - water, roads, ports, sewer

• Services for workers - schools, parks, roads, transit, public safety

• Improved public services (infrastructure and education, in particular) => faster growth

• Tax increases for local public services increases attractiveness and promotes growth; tax increases for redistribution have opposite effect

• Subsidies sometimes offered to attract firms

(3) Professional sports

• New stadiums create few jobs

• Money spent attending events would have been spent elsewhere in local economy

• Intangible impacts - pleasure, community pride, image