MEVE 016: Unit 10 – Urban Economics

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UNIT 10: URBAN ECONOMICS

10.0 Introduction

Urban economics is a field that studies how economic activities are distributed within urban spaces and how cities grow, develop, and function in response to economic forces. As urban areas become the primary hubs of population and production, understanding the economics behind land use, infrastructure, employment, and income distribution becomes essential.

This unit explores how economic resources are concentrated in cities, the theoretical frameworks that explain urban growth and structure, and the implications of scale economies, land rent, and urban hierarchies in shaping modern urban landscapes.

10.1 Objectives

After studying this unit, you will be able to:

·         Understand how economic resources are distributed in Indian cities.

·         Explain the economic base theory and its implications for city growth.

·         Understand the concepts of agglomeration and economies of scale.

·         Analyze land use patterns, rent gradients, and competition for land.

·         Describe the rank-size distribution and urban hierarchy among cities.

10.2 Distribution of Economic Resources in Indian Cities

Cities are economic powerhouses, often contributing a disproportionate share of national GDP despite occupying a small percentage of land area. The following subsections explore this concentration.

10.2.1 Concentration of Human Resources in Cities

Urban centers attract people due to job opportunities, better infrastructure, and social mobility. As a result, a significant portion of the educated, skilled, and working-age population resides in cities.

·         Metro cities like Delhi, Mumbai, and Bengaluru attract top talent across industries.

·         Urban migration fuels the growth of service and manufacturing sectors.

10.2.2 Concentration of Economic Output and Economic Activities in Cities

Urban areas contribute over 60% of India’s GDP. Cities house:

·         Corporate headquarters and service sectors.

·         Industrial parks, SEZs, and logistics hubs.

·         Financial institutions, retail markets, and technology centers.

10.2.3 Urban Spaces and Economic Deprivation

Despite economic wealth, many cities face stark inequalities:

·         Slums, informal settlements, and lack of basic amenities.

·         Spatial mismatch between job locations and affordable housing.

·         Economic deprivation often coexists with prosperity in cities.

10.3 Economic Base Theory

Economic Base Theory is used to explain the growth and development of cities based on their ability to attract income from external sources.

10.3.1 Concept and Definition of Economic Base Theory

The theory classifies all urban economic activities into:

·         Basic (export-oriented) activities: Industries that bring income from outside the city (e.g., software exports, tourism).

·         Non-basic (local-serving) activities: Industries that serve the local population (e.g., grocery stores, schools).

10.3.2 Origin of the Economic Base Concept

Developed in the early 20th century, the theory was first applied to U.S. cities to understand how external demand drives local growth.

10.3.3 Prediction and Assumptions

The theory assumes that:

·         City growth is driven primarily by basic industries.

·         Non-basic industries grow in proportion to basic industries.

·         External demand determines local economic health.

10.3.4 Limitations of Economic Base Theory

·         Oversimplifies complex urban economies.

·         Neglects internal factors like innovation and entrepreneurship.

·         Assumes constant ratios between basic and non-basic sectors.

10.4 Agglomeration and Scale Economies

Cities benefit economically when firms and people cluster together. This is the concept of agglomeration economies, which lead to scale economies or cost advantages.

10.4.1 Concept of Agglomeration and Scale Economies

·         Agglomeration: The clustering of firms or industries in a geographic area.

·         Economies of scale: Cost reductions due to increased production or operation size.

10.4.2 Types of Economies of Scale and Their Examples

·         Internal economies of scale: Occur within a firm (e.g., bulk buying, automation).

·         External economies of scale: Arise from the industry or city-wide context (e.g., access to skilled labor, supplier networks).

10.4.3 Relationship Between Agglomeration Economies and Internal Scale Economies

Agglomeration enhances internal efficiencies. For instance, an IT firm in Bengaluru benefits from both its own size and the city’s IT ecosystem.

10.4.4 Causes and Classes of Agglomeration Economies

·         Shared infrastructure (transport, internet)

·         Labor market pooling

·         Knowledge spillovers

·         Specialized services (e.g., legal, design)

Agglomeration may be:

·         Urbanization economies: Benefits due to overall city size.

·         Localization economies: Benefits due to industry-specific clustering.

10.4.5 Urbanization and Agglomeration Economies: The Optimum City Size

As cities grow, benefits increase up to a point. Beyond this, congestion, high rents, and pollution may outweigh advantages. Planners must aim for optimum city size that maximizes productivity without degrading quality of life.

10.5 Land Use, Density Gradients and Land Rent

Land is a limited resource in cities. How it is used and priced shapes the spatial structure of urban areas.

10.5.1 Land Use and Competition for Land

Different land users (residential, commercial, industrial) compete for limited urban space. Proximity to the Central Business District (CBD) often determines land value.

10.5.2 Land Rent

Land rent is the price paid for land usage. It varies with:

·         Location: Central locations command higher rents.

·         Accessibility: Well-connected areas are costlier.

·         Demand: High-demand zones have inflated rents.

10.5.3 Rent Gradient

This refers to how land rent decreases as distance from the city center increases.

10.5.3.1 The Basic Bid Rent Theory

Proposed by Alonso, this theory explains how different users bid for land based on their ability to pay. Commercial firms offer the highest bid for central land, followed by industrial users, then residents.

10.5.4 Significance of Land Rent and Density Gradients

·         Influences urban form and skyline (e.g., high-rises in CBDs).

·         Determines housing affordability and segregation.

·         Affects public transport planning and infrastructure investment.

10.6 Rank Size Distribution of Cities

City sizes often follow predictable patterns when arranged by population.

10.6.1 Concept of Rank Size Rule

According to this rule, the second-largest city is half the size of the largest, the third-largest is one-third the size, and so on.

·         Formula: Pn = P1 / n, where:

o    Pn = population of the nth ranked city

o    P1 = population of the largest city

o    n = rank

10.6.2 Causes of Rank Size Distribution

·         Historical development

·         Economic geography

·         Political and administrative policies

·         Regional disparities

10.6.3 Rank Size and the Urban Hierarchy

Rank-size analysis helps identify:

·         Primacy: Dominance of a single large city (e.g., Delhi, Mumbai).

·         Balanced hierarchy: Even distribution of cities (ideal but rare in developing countries).

·         Planning needs: For intermediate and small towns to reduce pressure on metros.

10.7 Let Us Sum Up

Urban economics helps us understand the forces shaping city growth, land use, and spatial distribution of resources. Cities concentrate human and economic capital but also face challenges like inequality and land scarcity.

The Economic Base Theory explains external income’s role in city expansion. Agglomeration economies show the benefits of proximity, while scale economies demonstrate the cost savings of large-scale operations. Theories of land rent and bid rent provide insights into land use patterns and price gradients.

Understanding urban hierarchies through rank-size distribution allows for better planning, investment, and equitable growth strategies.

10.8 Key Words

·         Urban Economics: Study of economic behavior and spatial organization in urban areas.

·         Economic Base Theory: Concept dividing city economy into basic and non-basic sectors.

·         Agglomeration Economies: Benefits of economic clustering in urban areas.

·         Land Rent: Cost of land usage depending on location and demand.

·         Bid Rent Theory: Theory explaining competition for central land among users.

·         Rank-Size Rule: Predictable pattern of city size distribution by rank.

 

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