The Welfare Consequences of City Bigness

The Welfare Consequences of City Bigness


ED GLAESER: In the previous discussion, we talked about situations
with multiple equilibrium, one where the city doesn’t exist,
and the other where the city is big. City leaders sometimes allude to these
types of forces as an excuse for national interventions,
to give their location an extra boost. But does the existence of agglomeration
economies really mean that cities are too small? Conversely, do negative urban externalities mean
that cities are too big? Generally speaking, economists think that
people do too little of unpaid activities that yield positive benefits to others,
like shoveling snow from their sidewalks. And too much of activities that
generate negative consequences for others like driving on congested roads. Arthur Cecil Pigou is the economist
who emphasized this most. A lot have urban policy is just
an application of this principle. Economists like congestion pricing of
roads because that corrects the negative externality associated with driving. In some cases, charging a price, which
is called a Pigouvian tax is feasible. In other cases,
we are forced to use quantity regulations. Like only allowing cars with even numbered
license plates to drive on Mondays and Wednesdays and only cars with odd numbered license plates
to drive on Tuesdays and Thursdays. Given the obvious inefficiency
of number plate regulations, you can understand why economists
like plain, honest congestion prices. But you can also imagine that the number
regulation is easier to enforce and that will often be true
about quantity regulations. A bright line rule that says that you can
never hunt out of season is considerably easier to enforce than a complicated
pricing scheme that requires higher hunting license fees
on some days than on others. In countries with weak institutions it
is particularly important to think about the difficulties with enforcement. Okay, following this detour, let’s go back to the welfare
consequences of city bigness. If each person coming to a city yields
benefits or cost to the existing residents, isn’t that a reason to
subsidize or tax the city’s growth? Maybe, but what about the place
that the person left behind? When you move from place A to place B,
you impact both locations. And before you can have a national
policy to subsidize one or the other place, you would better be
sure that the agglomeration effects or negative externalities are bigger
in one area than the other. As an example of this, consider moving
from a subsistence farm in a poor country to an overcrowded mega city. Moving to the city increases
congestion and maybe disease risk. That’s bad. But the move also increases the amount
of land per capita back on the farm and that’s good. If the farmer doesn’t own his land but
shares in communal property, then the move really does generate positive
externalities for his former neighbors. So to know if the city is too big or
too small, you’ve got to know if the down sides of
urban congestion are bigger or smaller. Than the benefits of having
more land in the rural area. And you can’t know that
without a lot more data.

Daniel Yohans

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