Urban Dynamics and Urban Externalities

Y. Kanemoto, T. Miyao

• Publisher: Taylor & Francis
• Year: 2013
• Print ISBN: 9780415866330
• eBook ISBN: 9781136473388
• Topic: Negocios y empresa
• Subtopic: Negocios en general

This title combines reviews of two of the most important branches of urban economics: dynamics and externalities.

Externalities in Space

YOSHITSUGU KANEMOTO¹

University of Tsukuba

1. INTRODUCTION

Cities are usually defined as densely populated geographic areas and a concentration of many people in a small area causes many types of externalities such as traffic congestion, racial discrimination, pollution, noises, and neighborhood amenities. This article surveys recent developments in the economic analysis of urban externalities. Since space plays a key role in urban living, our attention is focused on the spatial aspect of urban externalities.

“Externalities” arise when one economic agent does not compensate others for his actions which may directly affect their consumption or production possibilities. Smokers who do not, for example, pay for increasing others’ risks of cancer, or for the discomfort they may cause, produce externalities. Urban life is filled with examples of externalities: manufacturing producers may cause air and water pollution which negatively affects city residents and other producers; some individuals may have a racial prejudice against certain ethnic groups; a household may benefit from beautiful gardens of its neighbours; firms often prefer to locate in larger cities because of proximity to other firms; and an additional traveller in a congested road imposes external costs on other travellers by slowing them down. According to the Fundamental Theorem of Welfare Economics, a competitive equilibrium is efficient in the Pareto optimal sense if all goods are private goods and no externalities exist. This result, however, breaks down if there are externalities. An individual decision maker who generates externalities does not take into account external costs (or benefits) imposed on others. His decision must therefore be corrected to account for external effects. If, for example, the externality is harmful, the generating agent should be induced to diminish the externality compared with what private self-intesest would dictate. Externalities thus present a case of potential market failure where government intervention may be called for to guide a decentralized market system toward a point where resource allocation is efficient.

It is, however, too early to jump to the conclusion that government actions are always justified when there are externalities. For example, individuals who suffer from water pollution have an incentive to get together and bribe firms to reduce pollution. The reason why this may not happen is that the transactions costs to set up a market for pollution may be too high. If the government has to incur the same transactions costs as private individuals, then government intervention cannot improve resource allocation. Government intervention is justified, therefore, only if the coercive power of the government reduces the transactions costs.

Even if government intervention is justifiable, the government has to choose an appropriate policy among alternative policy measures. For example, introducing a Pigouvian tax/subsidy system is one way of modifying individual actions to achieve an efficient allocation. A tax placed on pollution will tend to reduce the amount of externality. If a corrective tax is set equal to the marginal externality costs suffered by others, an efficient allocation is attained. One problem with the Pigouvian tax/subsidy, however, is that it usually requires high administrative costs. In some cases, direct regulation of private activities such as a ceiling on pollution emissions and a control of land use may be less costly. Moreover, the government might also have to resort to cruder measures. For example, a Pigouvian tax/subsidy system for traffic congestion requires congestion tolls whose levels are different for different roads depending on the severity of congestion. Implementation of such a system is obviously very costly and the only practical policy tool may be a uniform gasoline tax whose rate is the same in all roads. In this situation, we see that while the uniform tax is an imperfect tool, it may still be better than no tax at all.

If the government has only imperfect tools (or none at all) to deal with externalities, the ‘first-best’ Pareto optimal allocation will not be achieved and we will subsequently face a complicated ‘second-best’ problem. For example, if no congestion tolls are imposed on traffic congestion, or if only a uniform gasoline tax is levied, then the appropriate benefit-cost criterion for building roads is no longer the same as one which is valid in the first-best world. This problem is discussed in Section 4 on externalities associated with transportation.

In this article, urban externalities are classified according to the types of agents who cause and receive the externalities: externalities from producers to households; externalities among households; externalities among producers; and externalities associated with urban transportation. The first four sections review contributions on these four types of externalities separately.

Section 2 deals mainly with air pollution externalities. In a spatial model of pollution, land use control, in addition to the Pigouvian tax, might be necessary to achieve an efficient allocation.

In Section 3, externalities associated with racial prejudice and housing upkeep are considered. Major issues in the spatial analyses of racial prejudice are: (1) what sort of a spatial pattern (an integrated, segregated or some other pattern) is necessary for a stable equilibrium, and (2) is there a possibility of dynamic instability when a small increase in the population of one ethnic group drives away the other ethnic group, causing a sudden change in the racial composition? Housing upkeep externalities refer to external benefits from good housing maintenance which are enjoyed by neighborhood residents.

External economies among producers, which are reviewed in Section 4, are considered as one of the major reasons why cities exist. We review two types of models: one which assumes that firms in the same city receive the same amount of external economies regardless of where in the CBD they are located and another which assumes that firms receive more externalities by locating closer to other firms even inside the CBD.

In Section 5, two types of externali...

Table of contents

• Cover
• Title Page
• Copyright Page
• Original Copyright Page
• Contents
• Introduction to the Series
• URBAN GROWTH AND DYNAMICS
• EXTERNALITIES IN SPACE
• Index