VANCOUVER – When we think about cities and towns, grand images of the built environment conjure in our heads. This includes residential buildings to house the local population; commercial and retail space for offices, restaurants and shops; and iconic public assets such as hospitals, schools, stadiums and parks. These images of grandeur, however, are not always a true representation of the dynamics playing out at the local level. They fail to account for the congested streets, dilapidated public spaces and rising crime rates. Not to mention the rising real estate prices, the overcrowded classrooms, and the unequal access to employment opportunities. A well-functioning community is often in a constant battle to achieve equilibrium between both the good and the bad sides of density. Ameliorating these discrepancies is the primary role of local administrations.
Perhaps the most important function of local administrations is making the difficult decisions about what to prioritize in their communities and how to allocate municipal budgets in the most efficient way. While this can sometimes play out in a rather arbitrary way, based on campaign pledges and in response to the loudest interest groups at the time, there are useful tools that can help local decision makers arrive at the most efficient and equitable outcomes. In fact, this is the primary role of economics. Economics involves the analysis of decision making under conditions of scarce resources. For local governments, the application of economic tools can aid administrations in making informed decisions about what issues to prioritize and how to best allocate the limited tax revenues that they have at their disposal.
"The most important function of local administrations is making the difficult decisions about what to prioritize in their communities and how to allocate municipal budgets in the most efficient way."
As I mentioned in a previous article, however, while planning departments are adequately staffed with Urban Planners, Architects and Designers, we seldom find Economists on the payroll of local administrations. In my 10+ years working with local governments across North America, Europe, Asia and Africa I can count on one hand the number of Economists that I have engaged with. A similar observation was made by the eminent urbanist Alain Bertaud in his book ‘Order Without Design: How Markets Shape Cities’. He noted that there was a lack of cross pollination among urban planners and economists; the former of which tends to make their name in practice, while the latter relegate themselves to the data-friendly environment of academia. Subsequently, we have cities that are designed from a planning perspective, but with little acknowledgment of the macro and micro level trends that are shaping them. Urban Economics, however, can offer a useful vantage point for shaping the structure, performance and even the policy objectives of a community.
"The application of economic tools can aid administrations in making informed decisions about what issues to prioritize and how to best allocate limited tax revenues."
While the most obvious application of urban economics is in understanding changes in the economy (namely the labour force), the urban economics toolkit is remarkably versatile and can be used for weighing up decisions around a great deal of important local issues, such as housing, crime, public transport and so on. This article takes a brief look at some of these important issues and how urban economics can be applied to inform decision making processes at the local level.
What is Urban Economics and How Can it Help our Communities Prosper?
Urban economics involves the examination of urban areas by utilizing the tools of economic analysis. In doing so, it can help local administrations identify the most important challenges their communities are facing and allocate resources in a way that can achieve the largest societal benefit. For local administrations, urban economics can provide a means of quantifying these alternatives and measuring their impact against one another and over different periods in time. This can help local administrations in answering important questions, such as:
Is next year’s budget going to be more or less than last years?
Which types of businesses/industries would benefit our community the most?
Are some groups in society benefitting at the expense of others?
Should we allocate the capital improvement budget to Project A or Project B?
In this way, urban economics can help communities manage change and make informed decisions about their future.
Cities are about Tradeoffs – The Upsides and Downsides of Density
It is important to recognize that cities are about tradeoffs. This means that a city with a thriving economy and plenty of job opportunities is naturally going to experience a rise in its cost of living and an increase in housing prices. Similarly, a city that improves its livability and quality of life, will inevitably become a product of its own success and experience growing congestion. The lesson here is that although at one point in time a city may be growing as a result of its successes, namely, the benefits that accrue from density (ie. jobs, shared cost of infrastructure, public amenities, etc.), the pressures of a growing population will eventually give way to what are considered the downsides of density (ie. rising crime, congestion and housing prices), and it will begin to shrink to a more tolerable level. In this way, cities are considered self-regulating. In urban economics this is referred to as urban economies and urban diseconomies of scale.
A stylized example of this can be seen in the following diagram, which shows that the optimal size of a city is at Y, as it continues to grow in population to Z (the horizontal axis) the quality of life, or ‘utility’ in econ-speak, diminishes (the vertical axis). As a result, people will move away from the city and the population will shrink back to X. The city will then work to improve itself so that it achieves its optimal level of tradeoff at Y once again. Over time these forces will continue to play out. It is the responsibility of local governments to manage them accordingly.
What are some Key Areas that Urban Economics can help Inform Decision Making Processes?
The size of a city and the quality of life it offers its citizens really comes down to the ability of local administrations to manage the tradeoffs between the upsides and the downsides of density. The following are some examples of areas in which urban economics can help local administrations manage these tradeoffs in order to offer the best quality of life for their citizens.
Employment – Perhaps the most useful application of urban economics is its ability to breakdown the forces that shape the local economy. A functioning labour market is evidently the most important economic factor shaping cities and the primary reason that cities exist. Labour markets, however, are subject to regular fluctuations and can be influenced by changes in national trends, industry specific trends, local level competitiveness and policy decisions. Knowing how such trends are affecting the structure of the economy and the economic base of a community can help local administrations to manage both positive and negative shocks. This helps administrations weigh up important decisions such as whether or not the local administration should support a struggling industry or attract a new one, which industries will benefit the community the most and if a projects benefits outweigh its costs.
Housing and Homelessness – Housing related issues are making headlines in cities around the world. In some city’s this is because speculation has set in, causing the housing market to resemble the stock market. In others, attempts to arrest an overheated housing market have led to policy failures that have distorted the markets. In some circumstances, the aging population has led to changes in preference of tenure and housing type, requiring communities to rethink age-friendly living. Urban economics can help shed light on the complexity of housing challenges, answering important questions such as how to identify the optimal amount of housing supply for a community? What policies can be put in place to prevent speculation and make communities affordable? And what are the best mechanisms for dealing with homelessness? The tools of urban economic analysis offer a means of quantifying different housing scenarios and policy measures, helping local administrations to identify the best path forward for their communities.
Crime and Policing – Recent spikes in crime have been weighing on the minds of many voters in recent years. This has led to the election of local leaders that have promised to be tough on crime. Finding ways of addressing this has therefore become a top priority of many local administrations. With stagnating municipal budgets, however, the allocation of resources to combat crime will naturally come at the expense of other priorities in the community. The tools of urban economic analysis can help to better understand the factors that are causing criminal activity in particular areas. What crimes are being committed? Do we have the requisite amount of police? Are criminals more sensitive to the severity of punishment or to the probability of getting caught? The toolkit of urban economics can help local administrations better understand the dynamics of crime in their communities allowing them to make more informed decisions and more effective budget allocations.
Congestion – The population of many cities around the world have outgrown the infrastructure that it was initially designed to accommodate. The result is growing congestion. While the typical planning solutions is to supply more infrastructure, urban economics offers tools that can help local administrations better optimize existing infrastructure. One such examples is the establishment of congestion charges. This is based on the assumption that drivers do not always pay their fair share of the cost of driving which includes additional costs that are placed on society (ie. pollution and congestion). Congestion charges are a way of internalizing these societal costs so that drivers pay the full cost of driving. The effect of which is a reduction in driving during peak hours and a shift towards alternative modes of transportation (ie. car-pooling or public transport). Reducing the number of private vehicles on the road, however, can only work if there are sufficient alternative modes of transportation available. The tools of urban economic analysis can not only help local administrations design more efficient transportation systems, but they can also be applied to develop more cost-effective financing schemes.
Education – Education is not a typical issue that planning departments work with. That being said, it is an important consideration that affects households and their decisions on where to live. For this very reason, urban economics is concerned with issues related to the quality of schools in a particular neighborhood and one’s decision to locate. The urban economic toolkit can be applied to answer questions such as, what are the effects of substituting an above average teacher for an average teacher on a student’s lifetime earnings? Or, would deselecting a mediocre teacher generate larger gains instead? In this way, urban economics can help local administrations and school districts to better understand the factors that lead to improvements in education thus influencing households’ decisions to locate.
While these examples are by no means a comprehensive overview of the application of urban economics to urban development and community planning related issues, it does provide some basic examples of how urban economic analysis can be useful in examining a wide range of issues that are important for local level decision making. It also demonstrates the added value that comes from applying urban economic analysis on top of typical planning related modes of analysis. For more examples of the role that urban economics can play in local level decision making, please continue to follow Economic Pulse Analytics on our social media platforms or reach out to us directly.
Kyle Farrell is Managing Partner and Chief Urban Economist at Economic Pulse Analytics. He works closely with local governments to provide them with population, housing and employment forecasts to make more informed decisions about their future. He holds a PhD with specialized knowledge in Urban Economics and regularly consults for the United Nations.
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