11Chapter1Introduction and Axioms of Urban EconomicsAppendix: Census DefinitionsThe U.S. Census Bureau has developed a variety of geographical definitions rele-vant to urban economics.Since much of the empirical work in urban economics isbased on census data,a clear understanding of these definitions is important.Thisappendixprovides thedetails of the census definitions.URBANPOPULATIONThe first three definitions deal with the urban population and are based on the cen-susblock,the smallestgeographicalunitincensusdata.Acensusblock isdefinedas an area bounded on all sides by visible features (streets, streams,ortracks)orinvisiblefeatures(propertylinesorpoliticalboundaries).Thetypical censusblockhas between a few dozen and a few hundred residents.A block group is a group ofcontiguous census blocks.Therearetwo types of urban areas:1.Urbanized area, An urbanized area is a densely settled core of census blockgroups and surrounding census blocks that meet minimum population densityrequirements. In most cases, the density requirement is 1,000 people per squaremilefor thecore block groups and 500peopleper squaremilefor the surroundingblocks.Together,the densely settled blocks must encompass a population of atleast 50,000 people.In 2000,there were 464 urbanized areas in the United States.2.Urban clusters.An urban cluster is a scaled-down version of an urbanizedarea.Thetotal population of the census blocksthatmakeupanurban clusterisbetween 2,500and 50.000people.In2000,there were3,112urban clusters intheUnited States.3.Urban population.The Census Bureau defines the nation's urban populationas all peopleliving in urbanized areas and urban clusters.Based on this defini-tion,79percentof thepopulation livedinurbanareas in2000METROPOLITANANDMICROPOLITANSTATISTICALAREASThe census bureau has a long history of changing its definitions of metropolitanareas.The general idea is that a metropolitan area includes a core area with a sub-stantial population nucleus,together with adjacent communities that are integrated,in an economic sense,with the core area. Over the years, the labels for metropoli-tanareashavechangedfromstandardmetropolitanarea(SMA)in1949,to stan-dard metropolitanstatistical area(SMSA)in1959,tometropolitan statistical area(MSA)in1983,tometropolitanarea(MA)in1990,whichreferredcollectivelytometropolitan statistical areas (MSAs),consolidatedmetropolitan statistical areas(CMSAs-the largestmetropolitan areas).and primary metropolitan statisticalareas(PMSAs—partsofCMSAs).Thenewlabel forareas considered metropolitan, implemented in 2000,is corebased statistical area (CBSA).Each CBSAcontains at least one urban area (eitheranurbanizedareaoranurbancluster)withatleast10,000peopleandisdesignatedaseitherametropolitanareaoramicropolitan area
12ChapterIIntroduction and Axiomsof Urban EconomicsI.Metropolitan area.Ametropolitan statistical area includes atleast oneurban-izedarea withat least50,000people2.Micropolitan area.Amicropolitan statistical area includes at least one urbancluster of between10,000 and 50,000people.In2000,therewere361metropolitan statistical areas and559micropolitan statisti-cal areas in the United States.The building blocks for metropolitan and micropolitan areas are counties.For aparticular CBSA,central counties are ones in which at least 5,000 people or 50 per-cent of the population resides within urban areas with at least 10,o00 people.Addi-tional outlying counties are included intheCBSAif theymeetminimumthresholdsofcommuting rates to orfromthecentral counties.Specifically,at least25percentofworkersinanoutlyingcountymustwork inoneofthecentralcounties,oratleast25 percent of the jobs in an outlying county must be filled by residents of one of thccentral counties.TogetherCBSAs contain93percentof the nation'spopulation,with83percentinmetropolitanareasandlOpercent inthesmallermicropolitanareas.Thepercent-age of the population in CBSAs (93percent)exceeds the percentage in urban areas(79percent)becauseCBSAs encompassentirecounties,includingareasoutsideurban areas (defined by the smallest geographical unit, the censusblock).PRINCIPALCITYThe largest municipality in eachmetropolitan or micropolitan statistical area is des-ignated a principal city.Additional cities qualify as“principal"if they meet mini-mumrequirementsforpopulationsize(atleast250,000people)andemployment(atleast100,000workers).Thetitleof eachmetropolitanormicropolitan statisti-cal area consists of thenames of up to three of its principal cities and the nameof each state intowhichthemetropolitanormicropolitan statistical area extendsForexample,thenameforMinneapolis metropolitan areaisMinneapolis-St.PaulBloomington,MN-Wl,indicatingthat itincludespartsoftwostateswithtwo othermunicipalities large enough to merit listing.For most metropolitan areas, the labelincludes only oneprincipal city.About a dozen largemetropolitan areas are dividedintosmallergroupingsofcountiescalledmetropolitandivisions
PART ONEMarket Forces in tbeDevelopment of CitiesIn amarket economy,individuals exchangetheir laborforwage income,whichtheyuseto buyconsumergoods and services.How dothesemarkettransactionsaffect cities?As we'll see in Chapter 2,cities exist because of the benefits of centralized production and exchange.We'll look at the rationalefor thedevelopment ofcitiesbasedontrade,production,andprocessingrawmaterials.Chapter3exploresagglomeration economies,theeconomicforces that causefirmsto cluster in citiesto sharethe suppliersof intermediate inputs,sharealaborpool,getbetter skillsmatchesbetweenworkersandfirms,andshareknowledge.Chapter4explorestheeconomicforcesbehindthedevelopmentof cities ofdifferentsizeand scope.We'lllookat howworkerutilityvarieswithcitysizeandseewhytheequilibriumcitysizeoften exceedstheoptimumsize.Chapter5exploresthesources ofurbaneconomicgrowth(increases inper-capita income)and urbanemploymentgrowth.It also ad-dressesthequestion of whobenefits from employmentgrowth and describes someof the techniques used by economists to predictfuture employment growth.13
CHAPTER2WbyDoCitiesExist?Nobodyeversawa dogmakeafairand deliberateexchangeofoneboneforanotherwithanotherdog.ADAM SMITHities exist because individuals are not self-sufficient.If each of us could pro-duce everything we consumed and didn't want much company, there would be noreason to livein dirty,noisy,crowded cities.We aren't self-sufficient, but insteadspecializeinalabortask-writingsoftware,playingtheaccordion,performingbrainsurgery-and useourearningstobuythethings wedon'tproduce ourselves.Wedothis because labor specialization and large-scale production allowus to produce andconsume more stuff.As we'll see in this chapter,production happens in cities, sothat's where most of us live and work.By living and working in cities,we achievea higher standard of living but put up with more congestion,noise,and pollution.To explain why cities exist, we'll start with a model that implies that theydon't.In themodel of backyard production,every consumer is aproducer,and allproduction occurs in backyards (or apartment roofs).In other words there is noneed for concentrated production or population.As we drop the assumptions ofthebackyard-productionmodel,the newmodels implythatcities will develop.In otherwords,the short list of assumptions in the model identifies thekey factors behindthe development of cities.AREGIONWITHOUTCITIES-BACKYARDPRODUCTIONConsideraregion that produces and consumes twoproducts,bread and shirts.Peopleuse the rawmaterials from land (wool and wheat)to produce the two consumerproducts.Thefollowing assumptions eliminate thepossibility of citiesEqual productivity.All land is equally productive in producing wheat andwool,and all workers arecquallyproductivein producingshirtsandbreadConstantreturnstoscaleinexchange.Theunitcostofexchange (thecostofexecutingonetransaction,includingtransportationcost)isconstant,regardlessofhowmuchisexchanged.Constant returns to scale in production.The quantity of shirts produced perhour is constant,regardless of how many shirts a worker produces.The same istrue forbread production.Together these assumptions eliminate the possibility of exchange and guarantee that each household will be self-sufficient.If a person were to specializein bread and thentradesomebread for shirts,she would incur atransactioncostequal to the product that could be produced in the time required to execute thetrade.Under the assumption ofequal productivity,there is no benefitfrom special-14
Chapter 2Why Do Cities Exist?15ization because everyone is equally productive.Under the assumption of constantreturns to scale,there is no benefit from producing shirts in factories because anindividual is just as efficient as a shirtfactory.In sum,exchange has costs withoutany benefits, so every household will be self-sufficient, producing everything itconsumes.The absence of exchange guarantees a uniform distribution of population.Ifpopulation were concentrated at some location,competitionfor land would bid upits price.People in the city would paya higher price for land without any compen-sating benefit, so they would have an incentive to leave the city.In the locationalequilibrium,the price of land would be the same at all locations, and populationdensity would be uniform.Recall the first axiom of urban economics:Prices adjust to ensure locational equilibriumIn this case, all sites are equally attractive, so locational equilibrium requires thesame price of land atall locations.ATRADINGCITYNow that we have a short list of assumptions under which cities don'tdevelop,let'sdroptheassumptions,onebyone,and see whathappens.We'll startbydroppingtheassumption of equal productivityfor all workers.Suppose households in the Northare more productive in producing both bread and shirts.This could result from dif-ferences in soil conditions,climate,or worker skills.Table2-1 shows the outputperhourforthetworegions.Whileeachworkerinthe South canproduce oneshirt oroneloafperhour,workersintheNortharetwiceasproductiveinproducingbreadandsixtimesasproductiveinproducingshirts.ComparativeAdvantageand TradeAregion has a comparative advantage in producing a particular product if it has alower opportunity cost.For every shirt produced, the North sacrifices 1/3 loaf ofbread, so that's the opportunity cost ofa shirt.In the South,the opportunity cost ofashirtisoneloaf.TheNorthhas aloweropportunitycostfor shirts,so ithas acompar-ative advantagein producing shirts.It is sensibleforthe North to specialize in shirts(andnotproduceanybread)because,althoughtheNorthistwiceasproductiveasthe South in producing bread, the North is six times as productive in producing shirtsComparativeadvantagemayleadto specialization andtrade.Supposethetworegions are initially self-sufficient, with each household producing all the bread andshirts it consumes.Table2-2 shows what happens ifa North household switches onehourfrombreadtoshirtproduction,anda Southhousehold goes theotherdirection,TABLE2-1ComparativeAdvantageSouthNorthBreadBreadShirtsShirts2611Output per hour3shirts1/3loafI shint1loafOpportunity cost