GEOGRAPHICAL ECONOMICS (SECOND PART) URBAN AND REGIONAL ECONOMICS

1. GEOGRAPHICAL ECONOMICS (SECOND PART)URBAN AND REGIONAL ECONOMICS José Luis Roig

2. WHAT IS URBAN AND REGIONAL ECONOMICS Urban and regional economics adds geographical space to the economic analysis of utility-maximizing households and profit-maximizing firms. It lies at the intersection of economics and geography. Urban and regional economics recognizes that goods are produced at certain locations, traded at some locations and bought by individuals who live at one location and work at another location. Distance between different economic activities implies costs for transporting goods and moving people. Distance also defines communication and social interactions among consumers and workers.

3. Increasing Urbanization Rates More than half of the World’s population now lives in cities Source: UN World Urbanization Prospects, 2009 Revision, esa.un.org/unpd/wup

4. Urbanization and Income Across Countries Source: World Development Indicators 2010

5. Urban Concentration in Europe Population density in 2005 by OECD TL3 region Source: Kamal-Chaoui and Robert (2009) Competitive Cities and Climate Change

6. Economic Concentration in Europe GDP per km2 in 2005 by OECD TL3 region

7. Productivity increases with employment density • Elasticity around 5%(U.S.),4.5%(Europe) • Doubling density increases productivity by 5%(4.5%)

8. Employment in the wine industry (SIC 2084) Sectoral concentration explained by natural advantages

9. Employment in the computer software industry (SIC 7371, 7372, 7373, 7375) No natural advantages

10. Employment in the Computer Software Industry (SIC 7371, 7372, 7373, 7375) San Francisco

12. Employment in the Carpet Industry (SIC 2273)

14. Agglomeration economies Firms can benefit from the concentration of other firms (A. Marshall): - Large labour market - Large market of intermediate input suppliers - Knowledge spillovers

15. Strong regional disparities of GDP per capita in EU • Blue Banana • Nordic Countries • Periphery • Large difference within • some countries • Spatial contagion (spatial • diffusion of development)

16. Accessibility and Transport Cost: The Market Potential GDP level provides a crude measure of economic size of a region. Some insight into the potential of attraction of new activity Besides its size, one expects the accessibility of a region from others to be another critical determinant of firms’ and workers’ locational decisions The market potential aims to capture the idea that being close to prosperous regions makes a region more attractive because it offers good access to several large markets M: Population, GDP, DI,…

17. Strong core-periphery pattern

18. More spatial dispersion. • Prosperous states scattered all over the country • Regional disparities are much • wider within the European Union than in the United States. Less strong core-periphery pattern

19. Two regions: A and B (Increasing returns to scale) A firm produces in both regions 10 units (15 hours in each) The firm produces 20 units by using 30 hours If the firm concentrates 30 hours in only one region will produce 25 units but transport costs to the other region (trade-off)

20. Economies of scale describes how average cost decreases as the • output quantity increases. There are several explanations for this • phenomenon: • Indivisible inputs: required to produce one or a thousand units • 2. Factor specialization • Learning-by-doing • Continuity • Simpler tasks (specialisation) can be mechanised more easily

21. Theory of Industrial Location • What leads firms to locate where they do? • Can space confer monopoly power? • How do compete firms in space? • To what extent firms behave rationally in their location decision?

22. Theory of Industrial Location A. Location of the firm and transport costs B. Location and market areas: spatial monopoly C. Location and market areas: spatial competition D. Behavioural theories of firm location

23. A. Location of the firm and transport costs • The Weber location-production model (fixed coefficients technology) • The Moses location-production model (factor substitutability)

24. The Weber Location-Production Model • Transfer-oriented firm: transport cost is the dominant factor in the location decision • The firm chooses the location that minimizes total transport costs Two types of cost: - Procurement cost is the cost of transporting raw materials from the input source to the production facility - Distribution cost is the cost of transporting the firm’s output from the production facility to the market

25. Four assumptions: • Single transferable output. The firm produces a fixed quantity of a single product, which is transported from the production facility to a market M • Single transferable input. The firm may use several inputs, but only one input is transported from an input source, F, to the production facility • Fixed-factor proportions. The firm produces its fixed quantity with fixed amounts of each input. No factor substitution • Fixed prices. The firm is so small that it does not affect the prices of its input or its output • The only costs that varies across space is transport cost • The firm will choose that location that minimizes transport costs

26. Resource-oriented firm. Firm that has relatively high costs for transporting its input. Example: A firm produces baseball bats

28. 7 tns. of beets needed for 1 tn. of sugar

29. Market-oriented firm. Firm that has relatively high costs for transporting its output to the market Example: Bottling firm of beverages

31. 10 tns. of wheat needed for 100 tns. of beer

32. Two inputs and one market: the Weber location triangle Example: car manufacturer uses steel and plastic • Single establishment – profit maximizer – price taker – • perfect competition – • 2 inputs single output • Critical factors m1 m2 m3; • p1 p2 p3; • M1 M2 M3; t1 t2 t3; K • Maximise profit • by minimising total costs Profit of the firm: Given the assumptions of fixed coefficients of inputs and fixed prices:

33. The location effect of input transport costs

34. The location effect of output transport costs

35. The location effect of varying factor prices

37. New suppliers and new markets

38. The Moses location-production model • Now the firm can substitute in favour of the cheaper inputs • The distance from the factory to the market, d3, is fixed • The firm chooses a location along the arc IJ

40. Budget constraints at the end points I and J

41. The envelope budget constraint

42. Location-production optimum

43. Effect of a road-building program that takes place in the area around M1

44. B. Location and market areas: Spatial monopoly Spatial market areas: linear market with equal transport rates Space can confer monopoly power on firms The lower transport and production cost are, the wider the monopoly area

45. Spatial market areas: linear markets with different transport rates and production costs

46. C. Location and market areas: spatial competition The Hotelling location game • Assumptions • Costless firm movement • 2. Homogenous product • 3. Consumers equally spaced along main street (i.e., sales are a + function of the market area) • 4. Perfectly inelastic demand • 5. Identical costs and transport rates

47. Welfare implications of the Hotelling result Loss Loss Gain

48. Effect of price competition on the Hotelling result

49. A firm lowers its price assuming that its rival’s prices will not change. • Rival firm lowers its price assuming that the original firm will not change its price again. • Etc. • Every firm is surprised when the other firm retaliates. • Result: Price shading continues until the firms price at or (temporarily) below MC

50. D. Behavioural theories of firm location • Models discussed so far rely on the assumption that “rational” firms will make a location decision so as to maximize profits • They have also assumed that the information available is sufficient for them to make maximizing decisions • But in reality information available is rather limited • Different firms will often have different information available to them • Some authors have argued that firms cannot and do not make decisions in order to maximize profits • They argue that firms make decisions in order to achieve alternative goals