Why are people – both in NZ and around the world – increasingly choosing to live in cities?
The answer usually advanced in response to this question, at least from an economic perspective, is “agglomeration economies”. In this post I want to unpack a few things about agglomeration economies, before discussing why I think our current understanding places too much focus on production as opposed to consumption. The post finishes by (briefly) considering why I think agglomeration economies in consumption are relevant to transport policy.
First, let’s consider how agglomeration economies are defined. In general, agglomeration economies are understood as the external economies of scale that arise from proximity. I tend to think of agglomeration economies as spatial economies of scale.
An example may help.
Consider street-lighting. Here the costs of provision (whether public or private) is largely independent of the number of people who actually benefit from the investment. Hence, the cost per person of providing street lighting will tend to be lower in larger and/or more dense areas. This type of agglomeration economies is one reason why larger (and in particular denser) cities are able to support more specialised public services, such as displays of giant pieces of fruit made from steel-pipe offcuts.
There are a number of other ways in which agglomeration economies give cities a productive advantage. Larger and more dense cities, for example, tend to have more efficient labour markets, in which better matches are found between firms and employees. City centres in particular seem to generate knowledge spillovers, whereby proximity facilitates formal and informal networking which in turn contributes to higher rates of innovation. While agglomeration economies vary across cities and industries, they do appear to be relatively significant. A doubling in Auckland’s “effective density”, for example, would be expected to cause a 5-10% increase in productivity (NZTA 2009).
But is this the full story? More specifically, is increased productivity the only way in which agglomeration economies can contribute to quality of life?
I think not. Instead, I’d suggest that a large part of the so-called “density dividend” manifests by way of benefits to consumers rather than producers Let me present two (personal) examples of agglomeration economies in consumption.
First, consider the “where shall Stuart eat dinner problem”. Now, I am someone who appreciates good food. So the fact I can access a diverse range of restaurants from my apartment in central Auckland makes me very happy. And while culinary contentment ranks high on my list of priorities, it does not directly contribute to increased productivity (NB: given how much time I spend dining out there is a high chance the presence of these restaurants has the opposite effect!). In this example, density has supported greater specialisation in the provision of goods and services (restaurants), which in turn leads to a more contented Stuart.
Second, consider the “who shall Stuart date” problem. Now I’m not ashamed to say that I was recently introduced to the word of “Tinder”, and by golly there’s much romantic fun to be had. For those of you who don’t know about Tinder, let me explain briefly: Tinder is an app for your mobile phone which enables you to “connect” (in all its wonderful forms) with people in the immediate vicinity. So how on Cod’s green earth is this related to agglomeration economies? Well, consider this: The number of potential Tinder matches is directly related to the sheer number of people in the surrounding area. Finding a Tinder match is simply a numbers game in which people living in Auckland’s city centre have a distinct advantage compared to, say, people who live in Waiuku.
As a tip for new Tinderers, I’d suggest taking an evening stroll up Maungakiekie to view splendid sunsets and rainbows.
So based on my own personal experiences of food and dating, I feel compelled to argue that agglomeration economies in *consumption* are relatively significant. Call me a hedonist if you will, but I’m as interested in consumption as I am in production. “Work to live”, as they say.
Unfortunately, consumer benefits don’t seem to rate a mention in most formal academic analyses of agglomeration economies. For example, when completing my masters thesis in economics I could uncover only *one* study of agglomeration economies in consumption, which was published in the Journal of Urban Economics in 2000 and titled “Separating urban agglomeration economies in production and consumption” (NB: I studied Spatial Economics at VU University, Amsterdam; I’d highly recommend this course to people interested in these kinds of spatial economic issues).
The paper’s author finds evidence of substantial agglomeration economies in consumption. More specifically, he finds that while agglomeration do increase nominal wages it tends to decreases real wages, once increased costs, such as congestion, pollution, and housing, are taken into account. In the context of an economic equilibrium that seems counter-intuitive, unless of course there is another (unobserved) countervailing economic benefit which arises from living in cities. The author posits this countervailing effect is agglomeration economies in consumption. While this is an interesting finding, I’d be the first to admit that more research is required before we draw a line under agglomeration economies in consumption.
If you’re still reading by this stage let me reward you by considering one final question: Why might agglomeration economies in consumption be relevant to transport policy?
The answer to this question is that agglomeration economies in consumption are likely to vary considerably between projects that concentrate development, versus those that disperse development. Project like the City Rail Link, for example, will tend to concentrate land use development not just in the city centre but everywhere there is a station. This concentration may in turn be expected to result in agglomeration benefits in consumption as more firms are able to overcome the fixed costs of setting up shop. Hence, agglomeration benefits in consumption may be relatively significant when considered across the entire rail network (in contrast to agglomeration economies in production, most of which will tend to be realised in the city centre).
And how might these agglomeration economies in consumption look when they eventuate? Well, the way they always have, both in NZ and overseas: As cute little shopping centres centered around train stations. Like Kingsland. That’s something worth investigating, methinks.
P.s. Hope you enjoyed “consuming” this somewhat nerdy post!
P.P.s. Puppy photo time! Not sure whether Princess Ku or I was the most chuffed with how the Tinder date worked out …