Abstract

This chapter surveys the fundamental forces that drive the formation and size of cities. We discuss the different types of agglomeration economies generated by a dense web of activities, with special emphasis on the benefits associated with the clustering of highly skilled workers. The distribution of activities within cities results from the trade-off between commuting and housing costs. We show that in this trade-off commuting costs are the cause and land rent is the consequence. The land rent capitalizes the advantages associated with proximity to particular urban locations such as employment centres. We identify the main sources of inefficiency in various urban policies implemented in Europe. Special attention is paid to the regulation of the land market and the pricing of urban transport.

Introduction

The main distinctive feature of a city is the very high density of activities and population, which allows agents to be close to one another. Households and firms seek spatial proximity because they need to interact for a variety of economic and social reasons on a daily basis. For example, individuals want to be close to each other because they like to meet other people, learn from others, and have a broader range of opportunities. Hence, the main reason for the existence of cities is to connect people. This need is gravitational in nature in that its intensity increases with the number of agents set up nearby, and decreases with the distance between them. Contrary to an opinion widespread in themedia, and despite the Internet and other new communication devices, face-to-face contact remains important, at least for a certain number of human and economic activities. To understand why this is so, one has to remember that information transferred through modern communication tools must be structured according to clearly defined schemes and codes known to all. Only formal and precise information can be transmitted this way. In contrast, information that is difficult to codify can often be conveyed only through face-to-face contact.

In the industrial era, cities have enabled transport costs between large and connected production plants to decrease substantially. Today, cities are the cradles of new ideas that benefit firms of very different sizes. But this is not new; cities are – and have been for centuries – the source of productivity gains as well as technological and cultural innovations (Hohenberg and Lees, 1985; Bairoch, 1985).