Saturday, October 28, 2006

Urban economics can be fun

The various factors of production are valued at any time according to how productive they happen to be which rests on how efficiently they are combined with the other factors. This applies to land, labor and capital, of course.

But the most highly valued land is in cities. The value of parcels and sites comes from competitive bidding for each location. The bids have a lot to do with what is going on at all of the other proximate locations.

This is complex and requires smoothly functioning land markets to sort out. There are inevitable externalities but their dollar value depends on realization, i.e., location. Does the laundry end up next to the soot-producer? Profit-seeking land users can be expected to locate so that the externalities that are realized end up bestowing the largest possible net effect and benefit.

This is some of the story of how cities come to be the engines of economic growth and the places where human creativity is most likely to flourish.

Matt Kahn's new Green Cities: Urban Growth and the Environment is good background for thinking about cities. It is refreshingly fact-based.

Cities are exciting but most urban economics texts are bone-crunching boring. Matt's book, on the other hand, is fun.