Professor: Keren Mertens Horn Office: Wheatley 5-78B Office Hours: TR 2:30-4:00 pm ECONOMICS OF THE METROPOLITAN AREA 212G, SPRING 2013

 PUBLIC GOODS  Goods that are neither excludable nor rival in their consumption (ex/National Defense)  EXCLUDABLE  Property of a good whereby a person can be excluded from consuming it (ex/Park)  RIVAL  The property of a good whereby one person’s use diminishes another person’s use (ex/Ice Cream)  NATURAL MONOPOLY  A monopoly that arises because a single firm can supply a good or service to an entire market at a smaller cost than could two or more firms. RECAP: ECONOMIC CONCEPTS

RECAP: SCALE ECONOMIES AND TRANSIT PROVISION Cost per passenger Ridership Demand P1P1 Marginal Cost Average Cost Q1Q1 P*P* Q*Q*

WHAT DETERMINES VALUE OF LAND? Rent/acre Acres Demand Supply Supply of land is INELASIC Price Elasticity of Supply: % ∆ Qs / % ∆ P Supply is elastic if a small percent change in price causes a big percentage change in the quantity supplied Supply is inelastic if a big percentage change in price causes a small percentage change in the quantity supplied

 Most land in the world is worth very little, but a little bit of the land is worth a whole lot!  Hong Kong’s central business district offices rent for $248 a square foot  New York City’s financial district offices rent for $114 a square foot  Downtown Boston offices rent for $87 a square foot*  What characteristics of a plot of land matter?  Accessibility  Physical condition of property and nearby properties  Agglomeration (ie nearby industry or commercial areas) which will determine the productivity associated with that plot of land  LOCATION THEORY  How activities are allocated to different places and land rents are determined  Land Rents – price of using a certain piece of land NOT ALL LAND IS CREATED EQUALLY *

 Simplifying Assumptions:  Everyone wants to be near Downtown Crossing  Everyone willing to pay the same amount to be located near Downtown Crossing  Rents will decline by $40 a month for each kilometer farther from downtown  Everyone uses the same amount of space to work and live  Now, based on our population we can figure out how big a space we need to accommodate everyone to work and sleep  We can also figure out where the farthest locations are, and what rent will be at each location LOCATION THEORY BASICS

LAND RENTS AROUND DOWNTOWN Rent Kilometers in one direction Downtown Crossing Displacement Cost Rent Kilometers in other direction Displacement Cost Slope of $40/kilometer Displacement Cost – losses associated with not being right near magnet site

 Assuming now that people have different displacement costs  Reasons include:  Some people value their time more highly  Some households have two workers that commute  Some people hate commuting  Some people willing to pay $40 to be near the magnet site  Other people only willing to pay $20 to be near the magnet site  Now how will people sort across space? DIFFERENT DISPLACEMENT COSTS

LAND RENTS WITH TWO CLASSES OF PEOPLE Rent Kilometers in one direction Downtown Crossing Displacement Cost Rent Kilometers in other direction Displacement Cost Slope of $40/kilometer Slope of $20/kilometer

LAND RENTS WITH MANY CLASSES OF PEOPLE Rent Kilometers in one direction Downtown Crossing Rent Kilometers in other direction

 Monocentric City Model  Model of a city in which all production is concentrated in one location and all workers commute to that location from outlying houses.  Probably very good model in 1900, when railroads and streetcars were the main forms of urban transportation.  In today’s world with trucks, cars, airplanes, buses, etc. cities are less likely to have a single center.  But in many cities (like Boston) Central Business Districts (CBDs) are still important centers of employment and commerce. MONOCENTRIC CITY MODEL

 In reality not everyone uses the same amount of space to work and live  A Home Depot needs a lot more space than a jewelry store  An apartment building houses many more families in a much smaller plot than a ranch house  Expect to see land-intensive uses (Home Depot) located in the periphery of the city and land-saving uses (apartment buildings) located in the center of the city  What makes people use more valuable land more intensely?  Factor Substitution – shifting input proportions as input prices change  Ex/Price of labor goes up relative to machinery will use relatively less workers and more machinery  Land is an input, and as the price of land goes up people will economize on land and use more labor and capital (will live in an apartment rather than a ranch house) DIFFERENT LAND INTENSITY

FACTOR SUBSTITUTION EXAMPLE Lot size/structure type Capital costs Land costs Total costs 2 acres/one-story$4000$1,000$5,000 1 acre/2-story$5000$500$5,500 ½ acre/4-story$7000$250$7,250 Lot size/structure type Capital costs Land costs Total costs 2 acres/one-story$4000$3,000$7,000 1 acre/2-story$5000$1,500$6,500 ½ acre/4-story$7000$750$7,750 Lot size/structure type Capital costs Land costs Total costs 2 acres/one-story$4000$10,000$14,000 1 acre/2-story$5000$5,000$10,000 ½ acre/4-story$7000$2,500$9,500 a. Land Costs = $500 per acre b. Land Costs = $1,500 per acre c. Land Costs = $5000 per acre

 Rich consume more land (and practically more of everything) so we may expect to find more rich households in the periphery of the city.  BUT rich also have higher displacement costs, since they have higher wages than poor people, so we may expect to find more rich households in the center of the city.  Here we see that displacement costs and land consumption work in opposite directions.  In many American cities we find rich households in the city center, with lower income households around them, and then farther out we again find rich households. APPLICATION: WHERE WILL RICH AND POOR LIVE?

 Economists strongly support the idea of taxing land to raise revenues for city services.  Why is a land tax so attractive?  Land is almost completely inelastic  This means that as price changes, the supply remains fixed  Remember from Micro What are the costs of taxation? LAND TAXES

REVIEW OF TAXATION Price Quantity D S D tax DWL Q* P* Q tax PsPs PcPc

LAND TAX Rent/acre Acres D S D tax Q* P*P c = PsPs Q tax = No Dead Weight Loss!

 PRICE ELASTICITY OF SUPPLY: % ∆ Qs / % ∆ P  Supply is elastic if a small percent change in price causes a big percentage change in the quantity supplied  Supply is inelastic if a big percentage change in price causes a small percentage change in the quantity supplied  MONOCENTRIC CITY MODEL  Model of a city in which all production is concentrated in one location and all workers commute to that location from outlying houses  FACTOR SUBSTITUTION  Shifting input proportions as input prices change  DEAD WEIGHT LOSS  The fall in total surplus that results from a market distortion such as a tax SUMMARY OF ECONOMIC CONCEPTS