ancient cities

866 Urban Economics
density of the surrounding region. This definition
accommodates urban areas of vastly different sizes,
from a small town to a large metropolitan area. It
assumes population density to be an essential feature
of an urban economy because it generates
frequent contact between different economic activities,
something that is feasible only if firms and
households are spatially concentrated.
Location Decisions and the
Development of Cities
A fundamental question of urban economics is
why cities exist. Why do people tolerate the obvious
negative consequences—congestion, pollution,
noise, and crime—of living in cities? The answer is
that cities exist because labor specialization and
centralized production make people more prosperous.
Cities offer a higher standard of living, and
roughly three-fourths of people in developed countries
choose to live in urban areas. Worldwide,
about one-half of the population lives in cities, and
the urban share is increasing. Urban economists
have identified three conditions necessary for the
development of cities: (1) agricultural surplus—
people outside cities must produce enough food to
feed themselves and city dwellers; (2) urban
production—city dwellers must produce goods or
services to exchange for food grown by rural workers;
and (3) transportation for exchange—there
must be an efficient transportation system to facilitate
the exchange of food and urban products.
At the heart of urban production is the notion
that centralized production is efficient for some
products but not others. If there are economies of
scale in production or in exchange (if unit cost
decreases as the quantity produced increases),
large-scale production is more efficient, and a city
develops because workers live near production
facilities. The resulting competition for land bids
up its price, causing an increase in population density
and thus producing a city.
Large cities develop when firms find it advantageous
to locate close to one another rather than
spreading out and carving out individual market
areas. In some cases, agglomeration occurs as
firms cluster around a source of raw materials or
near a transportation node such as a natural harbor.
In other cases, firms benefit from locating
close to other firms, including their competitors in
input and output markets. For example, firms producing
the same output (e.g., high-fashion dresses)
share a supplier of an intermediate good (e.g., buttons)
and locate close to one another to access the
supplier efficiently. Similarly, firms cluster to utilize
a common labor pool. In a modern economy with
its rapid technological change, clustering allows
firms to benefit from knowledge spillovers, that is,
from ideas and technological innovation that flow
from one firm to another.
Urban Spatial Structure
Urban economics explores the intraurban location
decisions of firms, workers, and households. Their
location choices cause variation in the demand for
land within a metropolitan area, thereby causing
spatial variation in the prices of land, housing, and
commercial space. This variation leads land users
to economize on expensive land, resulting in a spatial
variation in the density of population and
employment. Urban economists estimate density
functions and track them over time. Across the past
century, economic activity within cities has become
less centralized.
In modern metropolitan areas, jobs are divided
between central business districts, suburban subcenters,
and “everywhere else.” It turns out that
most jobs are elsewhere—widely dispersed throughout
the metropolitan area—and most people work
and live far from the center. In the heyday of the
monocentric city about 100 years ago, between
two-thirds and three-fourths of jobs were near the
center. Among the reasons for the dramatic transformation
of the spatial structure of cities was the
development of the truck, which replaced the horsedrawn
wagon for intracity freight and replaced
ships and trains for intercity freight. Other reasons
include the automobile as an alternative to streetcars,
the switch from multistory to single-story factory
production, and innovations in telecommunication
that allowed information-processing activities to
move away from the central core area.
When a household chooses a house or apartment,
it chooses much more than a dwelling. It
also chooses a set of local public goods (e.g.,
schools, parks, and public safety), taxes to
finance the public goods, and neighbors who
provide opportunities for social interactions and
schoolmates for their children. Urban economics