Economics of cities – notes on lectures
Lecture 1
First, it was all about agricultural societies. Urban centres became more important. So, both the rural
and urban population grew significantly. Cities and urban agglomeration are the dominant feature of
how we want to interact and live. The way we produce goods is too becoming centred in cities (Paris,
London, Gemany, etc.). All the things we need to live and work, is more and more being produced in
the agglomerations. Also, agricultural goods are not being produced at rural parts particularly (but
located near the big cities).
The activities, and creative activities are located in the cities. Innovation patents are located in the
cities, which drives economic growth. The ‘spikes are more pointy’ regarding the innovation patents
in the cities. It is about the competition between cities. Growth comes primarily from innovation, and
this is where the big companies locate. This phenomenon has been increasingly happening over the
years.
There are different episodes of economic development and industrialization were associated with
urbanization processes:
- VOC played a crucial role in shaping Amsterdam and its economic development
- Their population is estimated at 175000
- Amsterdam became a key port and hub of international trade
- Migration is a crucial part of this process (see chapter *)
The first industrial revolution started an agglomeration process and urbanization. In the ‘70s many
people left the rural areas. In the USA, many moved from rural to urban areas for first time in history.
There is a pattern in increasing living standards and economic growth, and people moving from rural
to urban areas.
It is a fact that human activities have been concentrated over time. Especially economic and
innovative activities. Agglomeration closely linked to major historical events, such as the first and
second industrial revolution - Also linked to economic development. Certain activities concentrate
more than other, and link this to economic development. Why does certain processes happen? And
what are the consequences of the world getting ‘spikier’? What should we do about that? Make
policies to promote complex industries or should we make effective policies for an equal distribution?
,Lecture 2
Agglomeration theories (Marshall theories)
In chapter 1 (location in a globalized world) localization of firm behaviour is being talked about:
- Transport costs
- Local factor prices
- Production possibilities
- Market structure
Some agglomeration patterns cannot be properly explained using these above theories. Paper and
rent are the main costs, you try to find a place where rents are low which minimizes your costs. From
economic point of view, firms locate outside the expensive areas. They locate close to the market
they operate in (where the patent rules/innovation is being done).
Marshall identified 3 possible sources of economies of scale that may lead firms to agglomerate
(those are not captured by the price system) according to Marshall:
1. Knowledge spillovers (learning)
Proximity allows information to flow on formal or informal channels. This information is shared
outside formal markets (is not usually a service). By sharing information participants can acquire a
better picture of the state of the market (it is mutually convenient). This may be very important in fast
changing industries.
Can you think of an industry example? (It could the focus of your presentation)
The price of oil for example, contains a lot of information. When the prices rises significantly, there is
something bad happening in the world. Blockchain is very different, the price is informal and says
nothing about the product itself. If you are close to the place where things are happening, you have
extra advantages. You get a lot of information because of your proximity. For example, ICT
sector/Silicon Valley.
Proximity is most important for fast changing/new industries. Clusters start to emerge, because
knowledge spillovers are more prominent there regarding big international corporations. Not only in
this picture, but also in Amsterdam those spillovers are happening (an app for where startups are
located). You can discuss and pitch your ideas with other who are in the same situation.
, 2. Local non-traded inputs (sharing)
If many firms in the same industry cluster together some inputs could be provided more efficiently
(fixed costs will be shared by the entire cluster). Specialized infrastructure in the area.
If clustered, some inputs that are required can be shared among the others. An example of non-
traded (it serves a particular population/place, it cannot be traded and exported), providing
specialized advice of infrastructure such as The Hague Airport. The business become more efficient. If
your main business relies on the transport, market flowers in the Netherlands for example, it is more
efficient to trade near Schiphol. The auction in being held near Schiphol, and they have a great
logistics for importing flowers and exporting asap.
3. Local labour pools (matching)
Allows firms to reduce cost of (specialized) labour by having access to a large pool of already trained
workers. For example, firms locating near universities for knowledge of students. Or, I think the
factories in China and India to reduce costs. Taxes also play a role in determining where headquarters
have to be located.
Identify the agglomeration type in this video: AH Zakelijk: je favoriete merk, ook lekker bezorgd op
het werk. (youtube.com). Local non-traded inputs, while it shared the cables and infrastructure. Also,
knowledge spillovers, because the nearer you are to the signal, the best thing you can get. This is
near the financial districts in Manhattan, and agglomeration advantages emerge. Firms match with
their employees.
Because of the learning, sharing and matching, this means a higher probability that information will
be transmitted, specialist services will be provided, and that skilled labour will be available (article of
Duranton and Puga). These externalities have those components. Clustering facilitated information
etc. and that is why you want to agglomerate.
Types of agglomeration economies (types of sources that they use why firms want to agglomerate)
according to Ohlin-Hoover:
1. Internal returns to scale (firm level)
This is within the firm itself. Some firms may achieve economies of scale by clustering activities in
space. The returns to scale occur within the boundaries of the firm. Note this is different from the
economies of scale that we mentioned previously.
The economies of scale happens within the firms, it agglomerates. For example, the larger a firm
becomes the more successful they are. In Argentina for example, a paper company produces also
sugar. Sugarcanes plantations, you press the sugar and that’s how you get sugar. But the sugarcane is
wasted than. This disposal is used for making paper (sustainability perspective). This reduces the cost
of both sugar and paper. This is a multimodal company and it has internal returns to scale.
2. Economies of localization (sector level)
Agglomeration economies for firms in the same sector and place. We can find examples where all
sources of agglomeration (Marshall’s) can give rise to economies of localization. Economies of scale
which are localized within a sector, it is shared by participants within a sector.
