Lec2 Economics of Cities Engr Dr Attaullah Shah

Lec-2 Economics of Cities Engr. Dr. Attaullah Shah UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

Contents • • • History of Cities Monocentric Cities Extension of monocentric cities Urban densities Theories of Urban growth – Central place theory – Urban Hierarchies – Economic base theory • Case study of Peshawar: – Urban displacement and Vulnerability in Peshawar city UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

• 6 major themes of urban economics according to Arthur O’Sullivan is divided into six related : i. Market forces in the development of cities ii. Land use within cities, iii. Urban transportation, iv. Urban problems and public policy, v. Housing and public policy vi. Local government expenditures and taxes. UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

Why Study Urban Economics • Understand how cities grow – Why, when and how – “real estate” typically refers to urban, not rural land • Understand what types of real estate are needed given the patterns of growth and the economics forces driving that growth • Determine what land is worth in unique locations in an urban setting – Land value is a function of a city’s growth patterns – Location of land – and its zoning and perceived value to end users – determine its value over time • Urban economics identifies land value as the determining factor for new development UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

Origin of the World First Cities • The city of Jericho in the Jordan Valley in 8 th Millennium BC • With 2000 population, the city had accumulated wealth and was targeted by raiders. • One Millennium later Catal Huyuk developed in Turkey with 5000 people and served as regional trade centre • Uruk was developed in southern Mesopotamia ( Now Iraq) having a population of 50000 in the second half of millennium • Archeological remains are the sources of study of economy of such cities. • The relics have shown city walls, buildings, household, implements, tools and craft fabrication and religious objects • It is not easy to derive meaningful information about the economy and other important aspects of their lives from these remains. • Due to limited information many questions still remain and the future excavation may solve some of these UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2 •

Conditions for Urbanization Initially it was believed that agriculture surplus has led to creation of the cities but later it was argued that it is not enough for developing cities alone. For cities to develop the economic benefits must offset the costs The role of trade and development due to obvious economy of scale The concentration of workers in a single enterprise if there are internal scale economies The learning and innovations by physical proximity of producers will generate cities The citizens will consume public goods and their close proximity will generate cities ( Religion or Defense) UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

Localization and Urbanization • Cities may grow due to agglomeration economies: – Concentration of industry ( Localization economy). The example of Silicon Valley – Size of the city ( Urbanization Economy). For example several hundred miles to the south of America Los Angeles, where there is no dominant industry • The study of localization and urbanization economies is not simple due to lack of proper data about the various important aspects of the data. UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

Economic Model of a City • Assume a circular city and all employment at Central Business District (CBD) and having N identical individuals • Each individual makes one trip each day to CBD and earns wage of “Y”. The greater the radial distance from Centre, more will be the commuting cost • For an individual living at distance x, the daily commuting cost is tx, which is out of pocket cost rather than time cost • If the utility function of the individual is v(q, c), where q is the consumption of services of housing and c is consumption of services of other goods. • The rental value paid by individual living at x for housing is p(x), which will depend on the nature of house, its accommodation , floor areas etc. The utility function of individual will be • There are three aspects of problem, choice of location, consumption on housing and goods UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

• If the location of the individual is denoted by x with corresponding housing value of q and consumption of houses and goods by c, then the budget line is shown in Fig. 1 • The indifference curve between choice of location having same utility function is denoted by concave curve • The equilibrium would lie at the point where indifference curve touches the budget or net income line i. e. co and qo • IF the net income decreases, due to reduction in distance from x 1 to xo, new equibrium is obtained at eo UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

Properties of housing consumption and location curve UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

Extensions of Monocentric city Model • Variety of interesting features have been added to the model: – Different income groups: Do individuals with high income would prefer to live closer or farther from CBD. The answer is farther. Why? – Traffic congestions: How commuting should be priced and how land should be allocated to congestion reducing road capacity – Modal access and non radial access costs: The city tends to develop along its radial roads and the rural urban boundary has to be non radial – Fully closed city: Unlike the monocentric model, the city aggregate land rents are also sources of income to the city residents. UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

Cities are changing • Employers are more dispersed on the metropolitan area. • In the US, CBD concentrates 20% of total employment in MA • In the US, CBD concentrates 40% of total offices in MA • Population (20% in 3 miles around CBD) and commuting UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

Urban density • Varies a lot across countries and cities in the US • Density gradient: Rate at which population decreases with distance density • For example, 0. 1 means the density decreases by 10% per mile from center. • In average the density gradient in the US goes from 0. 05 to 0. 15 • What can be the figure for Pakistan UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

IDENTIFY SOME CENTERS IN PESHAWAR CITY BASED ON THE USES?

• The rise of monocentric • Improve in transportation technology • Rule of thumb: “Radius of a city is the distance that can be traveled in one hour” • Hub and spoke public transit system in the 19 th Century • Before elevators, price of high floors were cheaper because they were rented at a discount that offset the costs of climbing Short CBDs four or five floors of stairs. UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

The decline of monocentric cities. • Decentralization of manufacturing • Intercity tucks. Trade off of moving away from center is between higher freight costs and lower wage. • Since freight costs decrease, it’s better to move out from centers • From factories close to ports, railroads and city centers to factories close to highways, beltways and airports centers. • Decentralization of offices • Advance of communications (a reduction in the need for face 2 face activities) • Decentralization of population • Evidence: Reduction in density gradients • Rising income and change in consumption bundles (not clear) • Decrease in commuting costs- “Jobs follow workers to suburbs and workers follow jobs to Suburbs” • Others: Old housing at the center, high taxes, crime, low quality education, etc. UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

Theories of Urban Growth • Essentially all are part of “location theory” → all forms of services and economic activity will find their optimal location – Central place theory • Development around a business, civic, religious core – Ancient cities of Greece and Italy – Driven by transportation –or lack thereof – and the need/ability to reach your customer audience – Axial theory • Development along topographical and/or transportation features • Cities along GT road – Concentric circle theory – a variation on central place theory • Development of the CBD • Concentric development of other, suburban nodes – “urban sprawl” and “edge cities” UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

Central Place Theory and the System of Cities • The “Big Picture” of cities… – Why cities form, grow, & decline – What are the centralizing & decentralizing forces that explain the number and sizes of cities – What is a "system" of cities, and the essential characteristics of the US system of cities – The key practical insights and principles of central place theory and urban hierarchy theory, and how real estate decision makers can use these – What is meant by the economic base and export base of a city – Employment & population multipliers UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

Central Place Theory and the System of Cities “Central Place Theory” “Urban Hierarchy” “Economic Base” UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

The Pattern of City Size • Cities are not isolated phenomena. • Each city is part of a “system” of cities. • Each city has a place and role as an element in this system. UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

Example: • A high-rise, upscale apartment building can make lots of money in Islamabad and Lahore. • The same building would probably lose lots of money in Mardan and Nowshera-Why? UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

The “Rank/Size Rule” (aka “Zipf’s Law”) Essentially, it’s pure Mathematics… - Suppose all cities grow at random rates over time. - Suppose all cities tend to grow at the same average rate. - Suppose all cities have the same “volatility” in their growth rates. - Then the “Zipf’s Law” rank/size pattern will result. But why would all cities tend to grow at the same average rate? … UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

Theoretical picture: UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

Actual sizes & ranks of European cities… UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

Why would all cities have the same volatility of growth? • Once a certain size, cities tend to have diversified economic bases. • Smaller towns do not have diversified economies, so they experience more volatility, causing many to “die out”. • So there are fewer small towns than Zipf’s Law would predict. UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

What this math cannot explain is: • Why do cities change rank so rarely? … • Rank changes tend to be systematic, not random (e. g. , southern & western cities tend to move up in rank, eastern cities move down. To understand the size pattern of cities, we must also consider location. . . UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

The Pattern of City Location • Look at a map of city size & location in the Pakistan. • Some cities and locations are more attractive • Geographical “Zones of Influence” UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

Factors underlying the pattern: • The “Rank/Size Rule”, & the Geographical “Zones of Influence” • i Centralizing city-causation ("centripital") forces are counter-balanced by opposing "decentralizing" ("centrifugal") forces. • ii The relative strength of the centralizing and decentralizing forces differs for different functions and activities. • Can you give some examples from your city? UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

Centripetal Forces: In political geography: – Centripetal forces are those forces that bind a country together. – The unifying factors such as language and religion that give people a shared, positive vision of what their country is all about. – Things like a strong sense of shared history and values and a shared language. – Centripetal forces can be reinforced by a threat of foreign aggression. – This has always been very effective in unifying a population. Would lead to fewer, larger cities… UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

1. Economies of Scale – Cheaper unit to produce more stuff at one place. – i. e. , Declining average costs with larger production capacity. – Due to “fixed” costs. – Example: Auto factory with 200, 000 cars/yr production capacity is more efficient than auto factory with 50, 000 cars/yr capacity. UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

2. Economies of Agglomeration – Productivity advantage of physical clustering. – Vertical & horizontal production linkages (synergy, critical mass). – Example: Silicon Valley. UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

3) Positive Locational Externalities – One firm benefits another firm nearby. – Example: Trucking firm & Airfreight firm hub. “Growth Spirals”, “Cumulative Causation”… UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

Centrifugal Forces • Decentralizing forces that put a break on urban agglomeration, result in a larger number of smaller cities. • Congestion • Pollution • Crime • High intra-urban transportation costs • High rents & urban land costs • High inter-urban transportation costs (with greater distance between fewer larger cities) UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

The Balance of Centripetal & Centrifugal Forces… • Centralizing forces are relatively stronger in comparison with decentralizing forces for some types of activities than for others… • National Government functions? … • International financial services? … • Corporate headquarters? … • Corporate research facilities? … • Light manufacturing? … • Distribution? … • Corporate branch offices, sales offices? … UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

Central Place Theory & Urban Hierarchy Central Place Theory (CPT)… Suppose “everyone” (13 people) lived on a 12 -inch ruler… In order to reduce 'spatial friction', places of similar size, rank, or function will tend to be EVENLY SPACED across geographical space and/or population. UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

A central place…. • A central place is a settlement that provides goods and services • This could be a village, conurbation or city. • This forms a hierarchy UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

No. of services provided Capital Cities High order Large Towns Small towns Middle Order Village Hamlet Low order Settlement population size

Assumptions • The larger the settlement the fewer in number there will be • The larger the settlement grows in size the further apart they will be • As a settlement increases in size so to will the number of functions increase • As a settlement increases in size the number of high order services will increase UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

Range and threshold • Central place functions are activities that market goods and services from central places for the benefit of local customers and clients drawn from a wider hinterland • Range is the max distance people are prepared to travel to obtain a good • Threshold minimum number of people needed to support it UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

Christaller’s model of Central Places • Walter Christaller • German • 1933 published a book to demonstrate a sense of order in the spacing and function of settlements • It was based on Southern Germany UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

Central place theory • Aims to explain the spatial organisation of settlements and their hinterlands. • Theory based on assumption that there was some sort of order in the pattern and function of settlements UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

Assumptions • Flat land between settlements so that transport was easy and cheap in all directions • Population was equal • Resources were evenly distributed • Goods and services were obtained from the nearest central place so as to minimise distance travelled • All customers had the same income and made similar demands for goods UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

Assumptions (cont) • Some central places had only low order goods for which people were not prepared to travel far so had a small sphere of influence • For high order goods people were prepared to travel for • No excess profit would be made by 1 central place and each would locate a far as possible from a rival to max profit UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

Shapes for theory • The ideal shape for a sphere of influence would be circular Central place Boundary of trade areas All the distances to the edge of the circle would be equal UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

When you start to introduce other central places Places in between are not served by any central place UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

Circles with no gaps Problem now: areas served by more than one place- this goes against the basic principles of the model

Best shape…hexagons

Here’s what it looks like in 2 dimensions… UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

Why Does CPT Matter? … Just a pretty academic theory? … Tell that to the developers of Forest Fair Mall! (and their lenders!) CPT is location theory In real estate, three things matter: location, & location! UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

Two practical principles of CPT: 1) If there is an under-served territory there is room for a new "central site"; and 2) If there is already a central site effectively located to serve a territory, it is going to be very hard to develop a new such site nearby the existing site. UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

CPT applies at various levels… · Which cities will grow fastest, and slowest? … · Where can you build a new mall? … · Which sites cast “agglomeration shadows”? … UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

4. Economic Base & the Growth of Cities & Regions Why would two cities, equally ranked and equally well located, grow at different rates over a period of time? … CPT cannot tell us. Enter: “Economic Base Theory”. . . UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

Definition: “Economic Base” (of a city or region): · The sources of the city’s (or region’s) income. · The engine that drives & underlies all real estate activity in a region. UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

Economic Base Analysis is a tool to help: Identify which cities or regions will grow. Help characterize what kind of growth (e. g. : "blue collar" vs "white collar"). Help quantify how much growth. UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

Three major components of the Economic Base: 1. Local production of goods and services both for local needs and for "export" beyond the local urban area; 2. Investment returns to or of capital owned in the local area, such as investment returns on the stored financial wealth of retirees; 3. Government transfers such as social security payments. (1) (local production) is most important in most urban areas. UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

The “Export” Base… In any city or region two types of goods and services are produced by the local economy: UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

Export Goods · Export goods and services are those produced in greater quantities than needed for local consumption. These goods and services are exported to other cities, regions, and countries. These are referred to as “basic” products (or basic production). The sector of the local economy that produces such goods and services is called the “basic” (or “export”) sector. UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

Local Goods · Local goods and services are those produced in quantities equal to or less than what is needed for local consumption. These are referred to as “non-basic” goods and services (or non-basic production). The sector of the local economy that produces such goods and services is called the “non-basic” (or “service”) sector. (This sector serves the local population and the export sector. ) UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

Export Base Theory: According to “Export Base Theory”: Economic growth of the city or region is dependent entirely on growth in the export ("basic") sector of the local economy. Because the non-export (service) sector exists only to serve (directly or indirectly) the export sector. UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

Example: Suppose PDA adds 100 employees to their treatment Plan facility. Where do those 100 employees come from? … Some from out of town (growth), others from the local area. The employees that come from the local area would have to leave their previous existing jobs in the local area. They will have to be replaced in those jobs. Where will those replacements come from? … Some from out of town (growth), others from the local area. Etc. , etc. , … Eventually all 100 jobs are a net addition to the local area total employment. This is because PDA is part of the Peshawar metropolitan economy’s “export base”. UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

According to export base theory, 2 -step process to forecast metro growth: 1) Identify which are the export base industries in the local region; 2) Forecast employment growth in those industries. Useful tools to apply export base theory to forecast regional growth… UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

Example: Metro builds a new supermarket on University Road , which requires 100 employees to operate. Where do those 100 employees come from? … Most from the local area, some from out of town. The ones that came from out of town prevent other local residents from getting those new jobs at Metro, because the new r jobs do not add to the total jobs in area, because it does not increase Peshawar exports to other regions. The new Metro does not cause Peshawar residents to eat more food than they otherwise would without the new Metro UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

Location Quotients Step 1 “Problem”: Identify which industries are in a given region’s export base (i. e. , “characterize” the economic base of the metro area). UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

Analytical tool to help solve problem: The “Location Quotient”(LQ) where: Nmi Industry "i" Nm all industries Ni "i" N industries = Employment in City "m" in = Total Employment in City "m" in = National Employment in Industry = Total National Employment in all UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

The “Location Quotient”(LQ) · LQ = 1. 0 → same proportion of local workers work in a particular industry as work in that industry in the nation as a whole. · LQ > 1. 0 → local area is more heavily concentrated in that industry than is the average city or region across the country. · In practice, it is usually considered that a location quotient must be significantly greater than 1. 0 in order to indicate that the industry is part of the export sector of the local economic base. UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

Example: Combine LQ analysis with large employer analysis to identify the economic base and forecast growth trends…. UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

Multipliers… 1) Employment Multiplier: 2) Population Multiplier: UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

Multipliers… Employment multipliers are typically in the range of 2. 0 to 4. 0. Population multipliers are typically in the range of 2. 5 to 9. 0. Note: Multiplier effects go both ways: · Loss of local export base jobs has a multiplier effect on the overall local economy & population. Note: Multiplier effects result only from changes in export base employment (rippling through the local service sector). UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

Note also: · Economic bases of cities evolve over time (sometimes rapidly) · Relations between economic sectors change over time (e. g. , oil may be cyclical or counter-cyclical). This makes it difficult to forecast correlations between cities regarding their economic growth rates. On the other hand: · Centrality of location · Availability of developable land · Business climate Tend to be more stable over time, facilitating general trend forecasting. UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

HPG Working Paper (Humanitarian Policy Group) Sanctuary in the city? Urban displacement and vulnerability in Peshawar, Pakistan Irina Mosel and Ashley Jackson (May 2013) http: //www. refworld. org/pdfid/523 ac 01 f 4. pdf Peshawar has endured multiple waves of displacement over the past three decades. Together with urban growth driven by economic migration, the influx of new residents has transformed the city. The various crises of displacement affecting Peshawar have resulted in a rapid increase in population and demand for services. Unfortunately, the government has not been able to meet this growing demand. Urban planning remains haphazard and services are uneven, with dangerous environmental and public health consequences………… Please read the chapter 8 Land Environment and write a note on the degradation of land environment of Peshawar city due to excessive urban settlement. How economic values of the city has been affected UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2

Essence of Survival “Every morning in Africa, a Gazelle ( small dear) wakes up, it knows it must run faster than the fastest Lion or it will be killed. Every morning a Lion wakes up, it knows it must outrun the slowest Gazelle or it will starve to death. It does not matter whether you are a Lion or a Gazelle – when the sun comes up; You’d better be running. ” UET-Pesh-UIP-5818 -Urban Economics and Real Estate-Dr. Attaullah Shah-Lec-2