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Quigley JEP (1998)

Quigley JEP (1998). Survey on economies of scale and growth:. Glasear JEP (1998). Summarizes economies of scale to asses the demand for cities in the future. Will cities disappear or continue growing. Agglomeration Economies: Scale economies in transportation and production Labor pooling

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Quigley JEP (1998)

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  1. Quigley JEP (1998) • Survey on economies of scale and growth:

  2. Glasear JEP (1998) • Summarizes economies of scale to asses the demand for cities in the future. • Will cities disappear or continue growing. • Agglomeration Economies: • Scale economies in transportation and production • Labor pooling • Informational Spillovers at city level • Worker’s Productivity Enhancement • Face to face interactions

  3. Glasear JEP (1998) (Cont.) • Congesting forces: • Higher costs of living • Higher Commuting costs • Pollution Costs • Crime • Selective migration (poverty)

  4. The Size of the City (3 steps) • The size of the city is determined thus by: • Localization economies: Different intensities across industries yield cities of different sizes • Urbanization economies: Firms under urbanization economies are attracted to big urban areas, enhancing the differences • Consumer spending: Bigger cities support more products

  5. So far we have seen: • Why do cities exist? • Economies of Scale in Production • Economies of Scale in Transportation • What determines the size of the city? • Localization Economies • Urbanization Economies • Shopping Economies • TODAY: Understand where cities exist by looking at the location decision of firms.

  6. Holmes and Stevens (Handbook of Urban Economics, 2003)

  7. Holmes and Stevens (Handbook of Urban Economics, 2003)

  8. Holmes and Stevens (Handbook of Urban Economics, 2003)

  9. Chapter 4 Where do Firms Locate?

  10. Goal of the Lecture • Study the location decision of the firm • The location decision of the firm is based on Profit Maximization: • Transportation costs • Local Inputs • Localization Economies • Urbanization Economies • Taxes • Public Goods and Services

  11. Transfer Oriented Firms • Transportation costs are the main type of costs. • Firm chooses location: min Transport Cost=Procurement Cost + Distribution Cost • X- Distance between firm and input source • Xm-Distance between input source and market location • Procurement Cost: witiX • Distribution Cost: woto(Xm-X) • wjPhysical Weight; tj Transportation rate • wjtj Monetary Weight

  12. Assumptions of the Model • Single transferable input • Single transferable output • Fixed factor proportion • Fixed Prices • Firm problem becomes to choose a X s.t.: min witiX-woto (Xm-X)

  13. Resource Oriented Firm • witi>woto • Firm’s location is close to input source • In general if the input is bulky, perishable, fragile or hazardous. • Examples: • Baseball bats • Canned Fruit $ Total Transportation Cost Procurement Cost Procurement Cost Distribution Cost Distribution Cost Input Source Market X Distance to Input Source X Distance to Input Source

  14. $ Total Cost Procurement Cost Distribution Cost Input Source Market Distance to Input Source Market Oriented Firm • witi<woto • Firm’s location is close to the market. • Output is bulky, perishable or hazardous. • Examples: • Automobiles • Bakery

  15. The Principle of Median Location • Remove the assumption of single output or single market • Assume that the city is a straight line • Firm distributes output to consumers in different locations • What location will the city choose?

  16. The Principle of Median Location • The optimal location for the firm is the one that splits the number of consumers in two equal halves • Where would the firm locate? Point C • Move to D: Gain 10x$t ; Loss 11x$t • Move to B: Gain 10x$t ; Loss 11x$t Distance A B C D E F G H I J K Costumers 2 8 1 10

  17. The Principle of Median Location • Where would the firm locate? Point K • Move to J: Gain 16x$t ; Loss 17x$t • Move to D: Gain 16x7x$t ; Loss 17x7x$t Distance A B C D E F G H I J K Costumers 4 4 4 4 17

  18. Transportation Costs and Labor Market • Firm locates close to market and input source $ Total Costs Transportation Costs Labor Costs T Distance from Market and Input Source

  19. Transportation Costs and Labor Market (Cont) • Firm locates away from market and input source. $ Total Costs Transportation Costs Labor Costs T Distance from Market and Input Source

  20. Group Discussion (4 people to a group) • Rank your city by size (Population) • What are the localization and urbanization economies in your city? • Does your discussion correctly predicts the rank size of the city?

  21. The Role of Government • Economic Development Programs: • Property-tax abatements • Low interest loans • Wage subsidies • Free land and infrastructure • Services to improve productivity Bartik, Timothy J. “Jobs, productivity, and local economic development: What Implications Does Economic Research have for the Role of Government,” National Tax Journal, Dec 1994, 47(4), pp 847861.

  22. Are Programs Efficient? Discussion • Program should exits only if there exists a Market Failure • Ideal World; w=w* → wt ≥ PC • Does Marginal Benefit=Marginal Cost? • Underinvestment of information and knowledge of small firms? • Are new jobs in one area, lost jobs in another? • External Spillovers?

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