Free exchange

The new urban penalty

Live in cities, pay for suburbs

TIM HARFORD, the undercover economist, has written an engaging book entitled

The Logic of Life

, for which the bloggers at Marginal Revolution have organised a book forum. Marginal Revolution's Alex Tabarrok


us to a new entry on Mr Harford's book from

Kevin Grier

, who discusses the chapter on "spiky" cities. Mr Grier writes:


Ed Glaeser has produced a large body of research offering insight on Mr Grier's comments and questions. To begin with, Mr Grier is quite right that land-use regulations in older, denser cities constrain new housing construction. This limits the extent to which supply can respond to demand, and it could potentially cause large price increases.

Those price increases depend upon other factors, too (PDF). Rising home prices indicate an increase in a city's wages or consumer amenities. If we find that wages aren't increasing as fast in some big cities as home prices, then we can conclude that consumer amenities must be increasing. It's reasonable to assume that this is taking place; crime rates in cities have dropped precipitously in recent years while demand for urban neighbourhood design and consumption appears to have increased.

Mr Grier continues by questioning the conclusion that improved communication technologies have benefitted large urban areas. It would be wrong to say they have been good for big cities exclusively, but there is a strong case to be made that such technologies may have been better for places specialising in the production and management of ideas than for other areas (PDF). Given the importance of knowledge spillovers, the internet's ability to facilitate inter-personal communication may have helped idea cities. More importantly, says Mr Glaeser, is the extent to which IT has increased the return to idea production. A good idea may now be managed from New York as it realises profits worldwide. This, obviously, is good for New York.

But what about the proposal to subsidise cities? Politically, this will always be a difficult sell. While the poor tend to live in urban places, increasingly the very rich do as well, and few Americans relish the idea of explicitly subsidising the rich (even if it would make other Americans richer, too). Moreover, while the vast majority of Americans now live in urbanised areas, the urban population is overwhelmingly concentrated in suburbs rather than dense, central cities.

That's important. The positive network externalities generated by cities depend on density (PDF). So, too, do other positive urban externalities (like lower carbon emission rates). Suburban settlements tend to lose value as they grow denser, however. Negative amenities like congestion overwhelm the more limited network externalities produced by low-density suburbs. This places suburban-orientated policy at odds with urban-orientated policy. Higher densities benefit compact center cities and harm suburbs, so the suburbs are likely to oppose efforts to subsidise compact center cities.

The positive externalities associated with center cities indicate that they should be subsidised. Given the political difficulties involved there, it might be smarter to focus on removing subsidies for rural and suburban places first. America's farm and highway policies divert resources away from some of the most productive places in the country, at great taxpayer expense. Hopefully, looming crises in food and energy markets will provide politicians the cover they need to dispense with these wasteful programs.

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