Technological spillovers
- innovation and creativity:
- personal communication fosters knowledge spillovers
- cities produce more patents (e.g . Silicon Valley)
- Learning and acquisition of human capital:
- knowledge spillover intra and inter industry
- opportunities to learn via social network
- city workers are more productive
What are the pecuniary externalities from a city existing?
- trade and production:
- gathering places for buyers and sellers
- centres of production
- industrial clustering:
- low probability of unemployment and labour shortage
- increasing returns from transportation costs e.g. shipping in bulk
Consumer city
- centres of consumption:
- urban density facilitates consumption
- high amenity cities have grown faster than low amenity cities
- urban rent growth > urban wage growth
Equal productivity (no incentive to have a city)
- no benefit from specialisation
- individuals can produce both goods with the same productivity
Constant returns to scale (no incentive to have a city)
- No need to produce in factory
- homemade will be sufficient
- exchange has costs without any benefits
Trading cities
Cities where outputs are traded through intra and inter region
When do trading cities emerge?
- when comparative advantage (specialisation & trade, offsets transportation costs) is combined with scale economies in transport (large trucks), exchange and production (efficient workers)
When do cities trade?
Trade criteria based on opportunity cost
- If exchange rate is greater than the opportunity cost of production
3 conditions of sustainable factory city
- Salary is high enough:
- cover higher cost of living
- spatial equilibrium (city vs rural):
- if factory product price > labour cost + input cost: migration from rural
- if factory product price < labour cost + input cost: back to rural
- Scale economies:
- Factory productivity is higher than homemade productivity
- Transportation cost:
- close enough to make total buying cost lower than homemade cost
Agglomeration economies (pecuniary)
pecuniary:
- firms:
- large pool of specialised labourers => lower wages, cheap training costs
- competition between service providers => cheap business services
- proximity to customers/suppliers => cheap shipping cost
- worker:
- more job opportunities => lower search cost
- proximity to other firms in the same industry => cheap relocation cost
Agglomeration economies (technological spillovers)
technological perspective:
- firms:
- knowledge spillover within and across industry => more innovative
- facilitate skill matching between firms and workers
- worker:
- knowledge spillover within and across industry => accumulate human capital
- easy to obtain job information => less information asymmetry between firms and workers
Agglomeration economies (summary)
larger cities provide more benefits to firms and workers than smaller cities (lower cost, more productive, wider variety of goods)
