Resource Planning in

Urban Areas
UNIT 10 URBAN ECONOMICS

Structure
10.0 Introduction
10.1 Objectives
10.2 Distribution of Economic Resources in Indian Cities
10.2.1 Concentration of Human Resources in Cities
10.2.2 Concentration of Economic Output and Economic Activities in Cities
10.2.3 Urban Spaces and Economic Deprivation
10.3 Economic Base Theory
10.3.1 Concept and Definition of Economic Base Theory
10.3.2 Origin of the Economic Base Concept
10.3.3 Prediction and Assumptions
10.3.4 Limitations of Economic Base Theory
10.4 Agglomeration and Scale Economies
10.4.1 Concept of Agglomeration and Scale Economies
10.4.2 Type of Economy of Scale and their Examples
10.4.3 Relationship between Agglomeration Economies and Internal Scale
Economies
10.4.4 Causes and Classes of Agglomeration Economies
10.4.5 Urbanization and Agglomeration Economies: The Optimum City Size
10.5 Land Use, Density Gradients and Land Rent
10.5.1 Land Use and Competition for land
10.5.2 Land Rent
10.5.3 Rent Gradient
10.5.3.1 The Basic Bid Rent Theory
10.5.4 Significance of Land Rent and Density Gradients
10.6 Rank Size Distribution of Cities.
10.6.1 Concept of Rank Size rule
10.6.2 Causes of Rank Size Distribution
10.6.3 Rank Size and the Urban Hierarchy
10.7 Let Us Sum Up
10.8 Key Words
10.9 References and Suggested further Readings
10.10 Answersto Check Your Progress

10.0 INTRODUCTION
Urban economics is a vast subject covering a series of concepts and issues
Scholarly journals publishing on urban economies answers questions like
Why do some cities grow faster than others? Why do some generate more
wealth? Why do some decline? Cities are places of agglomerations of people
rather than economic and political units. Cities face fierce competition for
mobile resources, money and talent. Cities’ size and location are key
determinants of wealth.Technological changes most of the time shift cities’
growth paths and accessible, well-connected cities exhibit higher growth. In
this chapter we will study the main economic forces that lead to the existence
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of cities and regional agglomeration. In particular we will study the theory Economics
and evidence on the emergence of cities and their effect on worker
productivity, urban amenities, and congestion.

In this chapter we are going to study some of the important concepts and
issues in urban economics. First we look at the distribution of economic
resources in Indian cities. In this we look at the distribution of two major
things: one, distribution of labour and two distribution of economic activities
and economic output from cities. Second we study the concepts and
significance of agglomeration and scale economies. Third we try to
understand the concept and significance of economic base theory in urban
land use, density gradients and land rent. In the last section we look at the
concept of rank size distribution of cities and its applicability in the real word
cities.

10.1 OBJECTIVES
After reading this unit, you will be able to:

• Analyse the distribution of economic resources in Indian cities

• Explain the key concepts and definitions of u Economic Base Theory
• Determine the concept and significance of Agglomeration and Scale
Economies
• Elaborate the concept and implications of Land Use, Density Gradients
and Land Rent

10.2 DISTRIBUTION OF ECONOMIC

RESOURCES IN INDIAN CITIES
Although the definition of urbanization differs from country to country and
from city to city, in general the term Urbanization refers to the process of
concentration of people in densely populated settlements where majority of
people drive their livelihood from non-primary activities. Although there are
several different theories and evidences of city development but it is largely
believed that urbanization gained its momentum in ninetieth century after the
industrial revolution. Industrial revolution made large scale production
benefiting from economies of agglomeration which absorbed the additional
rural workforce. This contributed to people migrating to cities for secondary
or manufacturing jobs leading to concentration of population. Thus cities
attracted more services and trade and transport was also given a boost. As
industrial technology progressed, cities attracted more specialized services
and more skilled population. Inevitably cities became concentration of wealth
and wealthy.Indian cities have shown varied distribution of resources both in
terms of wealth and skilled man power. Functional classification of Indian
towns was attempted in 1981 by Mitra based on census data of 1961 and
1971. The study took into account three non-agricultural activities –
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Resource Planning in manufacturing, trading and transport and other services. Since cities are
Urban Areas
places of agglomeration of economies, economic resources tend to
concentrate in the cities in varying proportions commanding more attention
in the developmental discourse in India. With liberalisation, Indian cities
have gained great economic importance with increasing competition on
resource allocation.

10.2.1 Concentrationof Human Resources in Cities

According to 2011 census, out of 1.2 billion people in 2011, 387 million or
32 per cent live in urban areas. India’s urban population has been consistently
on rise and is increasing more rapidly than rural population. Since
independence, for the first time in the last decade more people were added to
urban areas than rural areas. The distribution of urban population across size
classes of cities reveals that the proportion of population living in Class I
cities, and large and medium size villages has been increasing since
independence. This is called as the ‘top heavy’ nature of India’s urbanisation,
where concentration of population in million-plus cities increases with time.
Cities gain from agglomeration and scale economies as they grow in size, and
on the other hand, larger cities are subject to congestion costs and lead to
increases in inequality between megacity regions and the rest of the country.

10.2.2 Concentration of Economic Output and Economic

Activities in Cities
In the coming decades, the urban sector will play a critical role in the
structural transformation of the Indian economy and in sustaining the high
rates of economic growth. Moreover higher proportion of economic output is
produced in cities. Internationally, more attention is also focused on the scale
of cities in developing countries and their role and importance in the global
economy. McKinsey reports point to the fact that 600 cities will generate
more than 65 per cent of world GDP by 2025, of which 440 cities will
befrom the emerging economies like India, Brazil and China which will
contribute to 47 per cent of the expected GDP growth between 2010 and
2025. PricewaterhouseCoopers finds three of India’s cities among the top 40
in terms of 2025 estimated GDP i.e. Mumbai, Delhi, Kolkata, and predicts
that cities in emerging economies will grow faster relative to developed
countries. McKinsey estimated that 58 per cent of India’s GDP in 2008 was
urban and 59 to 70 per cent of GDP is generated by cities.The estimates of
Central Statistical Organisation (CSO) of India show that 52 per cent of GDP
was produced by cities.

The spatially differentiated development pattern has designated large cities as

locations for services and export-led growth and small cities and urban
peripheries as sites of manufacturing. Rural areas are imagined as the
providers of food security. The uneven structure of urbanisation has
implications for how these types of economic structure and processes get
distributed across places. Therefore, in multiple ways, settlement structure
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has potential implications for the urban and the national economy, and Economics
therefore is an important topic of discussion.

Post-independence India was largely an agrarian nation with agriculture

being the main contributor to national output and employment generation. In
1950 there was a shift towards industrialisation for self-sufficiency. In 1980s
the first wave of economic reforms was initiated with a push towards setting
up high value generating industries, liberalisation of imports, setting up of
export promotion zones, setting up telecommunication infrastructure and so
on. The shift towards high technology and capital and services intensive
growth became evident post-1991 when new economic policy was initiated.
Thereafter, there was a surge in the output produced in urban areas associated
with major reforms in trade, fiscal policy and industrial policy. In 2001, a
number of sectors were privatised leading to economic growth but witnessed
increase in inequality and unorganised employment. The spurt in output
growth following economic reforms in 1991 was largely driven by growth in
the manufacturing, construction, trade and real estate and business services
sectors, largely situated in cities. Currently more rapid growth is seen in the
services sector concentrated around large cities.

Urbanisation and Output Growth is one of the traditional ways of

understanding the relationship between the process of urbanisation and
economic growth. Since 2011, there is a clear positive relationship between
urbanisation and growth. The more urbanised states like Maharashtra, Tamil
Nadu, Gujarat and Kerala have very high levels of per capita income. The
more urbanised states continue to grow faster than others.

The Jawaharlal Nehru National Urban Renewal Mission (JNNURM) was

launched in 2005 which is the single largest initiative since Independence to
fund infrastructure and service provision in Indian cities.It particularly states
the importance of cities for economic growth as a rationale for investing in
infrastructure. Since urban economic activities are dependent on
infrastructure, such as power, telecom, roads, water supply and mass
transportation, coupled with civic infrastructure, such as sanitation and solid
waste management, it is pertinent for economic as well as inclusive growth of
Indian cities. It was recognised that cities and towns contribute to over 50 per
cent of the country’s GDP, they are central to economic growth. For the cities
to realize their full potential and become effective engines of growth, it is
necessary that focused attention be given to the improvement of
infrastructure. For cities to become the engines of national development and
to sustain India’s economic growth momentum, urbanisation needs to be
actively facilitated with inclusive growth as an important trend in managing
urbanisation for future.

10.2.3 Urban Spaces and Economic Deprivation

With increasing economic wealth in cities, cities have also become spaces for
economic disparity and economic deprivation. It is emerging in form of urban
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Resource Planning in poverty, vulnerability, and inequality. The National Urban Poverty Reduction
Urban Areas
Strategy remarks on the worsening of urban poverty despite an impressive
growth performance of cities as ‘cities and towns are unable to provide basic
shelter and associated infrastructural services’. They show that interpersonal
inequality in urban areas has been steadily increasing in most of the states,
and inequality between classes and caste groups has also increased. So,
inclusive growth of cities should aim at slum-free cities, improved access to
basic services, rights to land, shelter, and low income housing, self-help
group formation and financial inclusion.

10.3 ECONOMIC BASE THEORY

The economic base theory is one of the standard and the most well-known
theories of regional development. It explains why different regions have
different economic levels. While urban areas are considered as engines of
economic growth, growth influences the urbanization process, driving the
spatial evolution of production and population agglomeration.

10.3.1 Concept and Definition of Economic Base Theory

According to the economic base concept, the regional economy can be
divided into two sectors:

1) Basic activities which are activities devoted to the production of goods

and services ultimately sold to consumers outside the region

2) Non-basic activities which include activities involved in producing

goods and services consumed locally.

In other words, Basic activities are those which export goods and services to
places outside the economic confines of the community. For example large
scale industry like iron and steel industry; the products of this industry are
supplied to various regions. The non-basic activities are those that provide for
the need of the residents within the community’s economic limit; like
services provided by the local barber, tailor, retail shop etc. An increase in
the amount of basic activity within a region will increase the flow of income
into the region which in turn will result in an increase in demand for goods
and services within the region. Hence the theory assumes an increase in the
basic activity will increase export trade, thus highlighting the effect of the
development of the community linkage. Therefore the economic base model
focuses on regional export activity as the primary source of local-area
growth. According to this theorytotal economic activityis assumed to be
dichotomouswith a distinction being made between basiceconomic
activityand non-basic economicactivity.

10.3.2 Origin of the Economic Base Concept

With the rapid pace of urban growth, planners are continuously trying to
anticipate and influence this growth leading to healthy demand for regional
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economic models. Economic base model was the only instrument available Economics
for regional economic analysis. This model as explained earlier focused on
regional export activity as the primary determinant of local-area growth and
received the greatest amount of attention from scholars in regional science
between 1950 and 1985.

The economic base theory was first articulated in 1916 by the German
sociologist Werner Sombart, who wrote "actual city founders". He identified
people in positions of authority, wealth or occupation who drew income from
outside the city as "active, originative, or primary city formers". The "passive
or derived or secondary city founders," are those people whose livelihood
depended on the city formers. Similarly M. Arrousseau identified the primary
and secondary occupations of a town. According to him, the primary
occupations are those directly concerned with the functions of the town and
the secondary occupations are those concerned with the maintenance of the
well-being of the people engaged in those of primary occupation. Frederick
Law Olmsted also called such similar occupations as primary and ancillary
economic activity in an urban area. Thus by the early 1920s, the economic
base concept was recognised as a potential theory to explain the regional
growth process. Eventually, economic base model provided a framework for
developing plans for city development. A region's export base and economic
base was used to calculate a local-area economic base ratio which was further
used to forecasts of the future growth of the region. Many scholars used both
primary and secondary data of export to cities and its occupation structure to
predict city’s growth.

Weimer and Hoyt distinguished between "urban growth" and "urban service"
industries. They opined that a region's potential for growth depended on the
growth industries in urban areas. They used income and employment data
and location-quotient methodology to identify economic base of urban areas.
Location-quotient methodology compares a region's concentration of
economic activity in a particular industry with that of a benchmark economy,
usually the entire country in which the region is located. By 1940s, these
techniques were used in many cities and states in urban and regional planning
and their economic analysis. By 1950, economic base theory became
established as the primary tools of regional planning. It was established that
for exports to be considered the only exogenous determinant of regional
growth, all other factors, related to both demand and supply, must remain
fairly constant for the prediction to be accurate. So certain other variables
were listed to take into account for a more comprehensive model of regional
economic activity; like population levels and interregional migration patterns,
regional capital investment levels and annual flows, state and local tax
policies, changes in the cost of transportation to reach external markets etc. It
was noted that this model might explain economic growth in small or highly
specialized economies but it was inadequate to explain the growth of
complex urban economies. It was widely agreed that supply factors needed to

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Resource Planning in be added to the model in order to make it relevant for long-run regional
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economic analysis.

By the beginning of the 1960s professionals got were divided into three
distinct methods of research within the economic base paradigm: those who
still considered the economic base model to be a reasonable framework for
urban growth analysis; those who questioned its validity but pursued more
empirical evidence before discarding the paradigm; and those who rejected
the validity of the hypothesis.

10.3.3 Prediction and Assumptions

The division of regional economic activity into these two distinct sectors is
the central concept of the economic base theory. Its fundamental behavioural
assumption is that non-basic economic activity depends on basic economic
activity. The model also assumes that the income injected into the regional
economy and the accompanying potential for developing locally oriented,
non-basic industries are in proportion to the size of a region's export base.
Static and demand oriented assumption ignores factors that affect the supply
of a region's output and other changes that affect demands.

10.3.4 Limitations of Economic Base Theory

Over the years many scholars have expressed concern with the narrow focus
of economic base theory on exports, just one portion of the demand side of
the regional growth equation to the exclusion of important supply-side factors
and constraints. Most notably, James P. Lesage and J. David Reed (1989) and
Lesage (1990) have provided empirical evidence in support of the economic
base hypothesis as both a short-run and long-run theory of regional growth.
These authors suggest that their models could be used both for short-term
forecasting of regional employment, income, and product and for longer
range regional economic planning and policy analysis. Although the model
has been enhanced over the years to include additional variables as well as to
capture more explicitly the dynamic nature of the regional growth process,
most changes have been made within the scope of this simple demand-
oriented specification. In general, economic base models have not evolved to
acknowledge the potential impact of many important variables that may
affect regional growth like interregional capital flows; labour migration
patterns; changes in products, tastes, and production processes; demographic
shifts; changes in state and local tax laws etc. Because these issues are
generally too important to ignore, many regional scientists have concluded
that economic base theory lacks the complexity to provide a useful
framework for analysing many regional economic issues and policies.

If these claims were valid, then the economic base model will be crucial in
decision-making contexts. Because regional economic models play such an
important role in planning and policy discussions, it is important to have a
clear understanding of their strengths and weaknesses.
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Check Your Progress Exercise 1 Economics
Note: a) Write your answer in about 50 words.
b) Check your answer with possible answers given at the end of the
unit.
1) How does an agglomeration economy influence city growth?
…………………………………………………………………………….
…………………………………………………………………………….
…………………………………………………………………………….
…………………………………………………………………………….
…………………………………………………………………………….
2) Why do cities show hierarchical distribution as explained in rank size
rule?
………………………………………………………………………….....
………………………………………………………………………….....
………………………………………………………………………….....
………………………………………………………………………….....
………………………………………………………………………….....

10.4 AGGLOMERATION AND SCALE

ECONOMIES
10.4.1 Concept of Agglomeration and Scale Economies
Agglomeration in simple term can be defined as concentration of people and
their activities in space. The economic advantage of spatial concentration is
called agglomeration economies. Scale economies are defined as the
economic advantage of producing a good or service at a large scale. The scale
economies are divided into two categories: internal scale economies and
external scale economies

Co Average cost
st

Output

Figure 3.1 Internal scale economies

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Resource Planning in Internal scale economies are the economic advantages of an increasing rate
Urban Areas
of output of a single production unit like firm, factory etc. These are
represented in form of an inverse relationship between the per unit or average
cost of production and scale of production or output (Figure 3.1).

So what causes of internal scale economises? There are several causes for
internal scale of economies to function. First and most famous cause is the
explanation given by Adam Smith in 1776 called as the division of labour.
Drawing form the process of manufacturing pins in an industry, he concluded
that if a single person (or single labour) is used to do a particular task, the
produced output can be much higher with the same input of labour hours. In
other words, there is an apparent economic advantage of the large production
unit over a smaller one. Capital indivisibility is another explanation for
internal scale economies. Consider a farmer wants to install a tube-well (an
indivisible piece of capital) to irrigate his farm. He needs a lot of capital to do
so but installing the tube-well will increase his output to manifold and he can
irrigate his land in much less time. His farm size is small and production is
not much to suffice for the investment. So in this case a large farmer with
greater output will have better advantage to invest in indivisible capital and
augment production. Another example of internal scale of economy is
software industry where fixed costs do not have to involve capital. Most of
the cost in developing software is in research and development. Once the
software is made, copying and distributing the code is very low. There are
again some types of production process that are not efficient in the small
scale. For example blast furnaces where iron is extracted. Thermal efficiency
of large blast furnaces is higher with small fuel use than small furnaces. In
other words if there are many blast furnaces or many iron smelting plants, it
is economically disadvantageous than having a single high capacity blast
furnace with a large iron smelting plant. For many goods, one of the keys to
profitability is producing just enough to meet an uncertain pattern of demand.
For example, some goods like shoes, one has to produce more a variety of
shoes with different sizes to fit the distribution of foot sizes in the population
of potential customers. Moreover, since shoes are from the fashion industry,
some shoes which will not be sold at the end of season will have to be sold in
heavy discount. The statistical theory tell us that larger the sample, more
closely it will confirm to the population distribution. So a larger producer
finishes with smaller proportion of unsold shoes. This phenomenon is known
as statistical scale economies and is applicable to a broad range of industries.

External scale economies are economic advantages that arise form the size of
an industry or group of firms rather than from the scale of any single firm.
Often external economies of scale are spatial in nature, meaning that firms
benefit from the combined scale of production in a group of firms that are
clustered in space which is often town or cities.

Figure 3.2 illustrates the difference between internal and external scale of
economy in space or spatial context.In the central frame there are nine
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factories or production units scattered in a region, in left frame all nine Economics
factories are located together benefiting from the internal economies of scale
and in the right frame all nine factories are clustered together but not
combined signifying external economies of scale. If external scale economies
are available in this particular industry, this clustered pattern of production
should be more efficient that the dispersed production. In other words,
external scale economies occur because each firm benefits from the close
proximity of the other firms. Thus spatially defined scale economies
constitute a class of agglomeration economies.

Internal scale External scale or

Agglomeration
Figure 3.2. Scale economies in space economies

Factory

10.4.2 Type of economy of scale and their Examples

Internal economy of scale: It can be either Pecuniary or Technological.
Pecuniary economy of scale is about being able to purchase intermediate
inputs at volume discounts. Technological economy of scale can be of two
types: Static technological and dynamic technological. Static technological
happens due to falling average costs because of fixed costs of operating a
plant and Dynamic technological scale is due to learning to operate a plant
more efficiently over time.

External economies of scale or agglomeration: it can be either localization or

urbanization. Both localization and urbanization can be both static and
dynamic.

Static localization can be drawn from three types of examples like:

1) Shopping - Shoppers are attracted to places where there are many sellers

2) “Adam Smith” specialization - Outsourcing allows both the upstream

input suppliers and downstream firms to profit from productivity gains
because of specialization

3) “Marshall” labour pooling - Workers with industry-specific skills are

attracted to a location where there is a greater concentration

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Resource Planning in Dynamic localization can be drawn from the example of “Marshall-Arrow-
Urban Areas
Romer” which is learning by doing reductions in costs that arise from
repeated and continuous production activity over time and which spill over
between firms in the same place.

Static Urbanization can be drawn from examples like:

1) “Jane Jacobs” innovation - The more that different things are done
locally, the more opportunity there is for observing and adapting ideas
from others

2) “Marshall” labour pooling - Workers in an industry bring innovations to

firms in other industries but the benefit arises from the diversity of
industries in one location.

3) “Adam Smith” division of labour - Outsourcing allows both the upstream

input suppliers and downstream firms to profit from productivity gains is
made possible by the existence of many different buying industries in the
same place

Dynamic Urbanization can be drawn from examples like:

“Romer” endogenousgrowth - The larger the market, the higher the profit; the
more attractive the location to firms, the more jobs there are; the more labour
pools there, the larger themarket and so on.

“Pure” agglomeration is spreading fixed costs of infrastructure over more

taxpayers; diseconomies arise from congestion and pollution.

10.4.3 Relationship between Agglomeration Economies and

Internal Scale Economies
Internal scale economies are related to the agglomeration economies in the
sense that if production is at a large scale it will be concentrated at fewer
points in the landscape.

Minimum production Minimum transportation

cost
Factor Town

Figure – 3.3: Trade-off between internal scale economy and transport

212 cost
 Urban
In figure 3.3, the diamonds represent factories and circles represent towns. Economics
On the left side, the box represents one big factory to serve all towns and on
the right side there are factories located near each town. Scale economies will
favour the first one. But there is a trade-off between internal scale economies
and transportation costs. If transportation costs are so high as to offset any
scale economies gained by concentrating all production in one factory, the
more dispersed distribution of production may actually be more efficient.

10.4.4 Causes and Classes of Agglomeration Economies

There are two main classes of agglomeration economies: Urbanization
economies and Localization economies.

Urbanization economies arise from the benefits that accrue to a broad

diversity of firms and households concentrated in an urban area. An
urbanization economy may arise due to various reasons. Certain type of
infrastructure can be most efficiently provided for large clusters like water
and sewage systems. A large investment in water and sewage network is
more economically efficient to serve densely populated urban areas than
comparatively dispersed households in rural areas. Similarly infrastructure of
bus and train terminus and airport is only viable where there are large
population base and large economic activity. In other words there are a
variety of infrastructure services that are only available to spatial
concentrations because they would be exorbitantly expensive to provide for a
dispersed population.

Another type of urbanization economy is called as juxtaposition economies.

In this case industries benefit from locating near each other because output of
certain industries becomes input for the other. So by locating near each other
they can save on transportation cost also and benefit from agglomeration. For
example automotive assembly plants receive inputs from firms that make
glass, electronics, fabricated material etc. So diverse but highly inter
connected firms come at one place forming spatial industrial complex.

Urbanization economies also arise from the very fact that big places tend to
be more diverse that small places. Jane Jacobs pointed out that the very
diversity of big cities forms a culture of innovation and rapid adoption of new
technologies and institutions that is conducive to higher productivity. Big
cities also offer greater variety of goods and services to buy with the incomes
they earn.

Localization economies arise from the benefits that accrue exclusively to

firms in the same or similar industries that are located in proximity; for
example microelectronics in Silicon Valley, steel in Detroit and steel in
Pittsburgh. Such industries located near each other because of factors like
availability of skilled or specialised pool labour at the same place giving rise
to specialised labour markets. Some industries are information intensive like
fashion industry which gain from locating together. Another reason is the
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Resource Planning in presence of highly specialised producer services that cater to a specific
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industry.

10.4.5 Urbanization andAgglomeration Economies: the

Optimum City Size
Urbanization is the evidence of agglomeration economies. Further urban
agglomeration becomes increasingly important because of the globalization
of world economies.But there is a “fundamental trade-off” between
agglomeration economies, which make wages and productivity increase with
city size, and crowding diseconomies, which makes commuting and housing
costs increase with city size. So as cities get bigger, some things such as
productivity and variety improve, while others such as pollution and
congestion gets worse. So there is a trade-off between agglomeration costs
and benefits which is dependent of the size of the city (Figure 3.4). When the
costs exceed benefits, planners and policy makers should plan for dispersion
for a more planned and balanced city development.

Agglomeration costs

Cos
Agglomeration benefits
ts

City size

10.5 LAND USE, LAND RENT AND DENSITY

GRADIENTS
There are several uses of land in the urban spaces. Since land is fixed, there is
constant completion among different sectors to use the land. In a world with
only economic considerations, land will be devoted to the uses to the best
possible use fetching maximum profit. Accordingly the land rents will be
determined and whichever activity pays the maximum would get to use the
land. Density of land use thus will vary according to the rents the parcel of
land demands and the activity that can afford it.

10.5.1 Land Use and Competition for land

Land can be utilized by any of several activities. Land being a fixed resource
is always under competition for different uses. Moreover, land having good
soil, climate, better accessibility, and areas suitable for agglomerationunder
the influence of local external economies, are in further demand. The price of
land, which depends on demand and competition for land, varies with quality
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and access. Thus land use or location of different activities on a particular Economics
parcel of land is dependent on its competitive use. Owners of the land will, (if
they want to) maximize their economic welfare or use it for the purpose that
will pay a higher rent. However, we must keep in mind that land markets are
not so perfect in their allocation, nor are owners only looking for profit.If
land is put to use only taking into account profit, then social welfare and
environmental concerns will be surrendered. Many governments thus
controls land use by the process of land use zoning and demarcation through
ordinances, urban renewal subsidies and reservation of land for public use.

In order to understand in what way land is allocated to various land use

activities, we will have to understand what determines how strong a bid any
particular activity can make for the use of the land. In other words, what is
the maximum rent per acre that the activity could pay for land in various
locations. However, you must note that this logic can explain land use pattern
only if one is using prices, costs, and profits as a principal mechanism for
allocating land resources.

10.5.2 Land Rent

Generally land use is governed through a price system. The price of using
land is identified as rent. In economic terms, parcel of land goes to the
highest bidder or to the person who can pay the maximum rent. We have
already studied in the earlier section that there is an evident economic
advantage to agglomeration, leading firms and household to compete for
scarce supply of urban land. This competition creates rent disparities across
space. The price of advantageously located property is bid up relative to other
areas. To understand how this happens urban economists have given a theory
of bid rent gradient which we will discuss in this next section.

10.5.3 Rent Gradient

The theory of bid rent gradient states that, the (land) rents are declining
function of distance from the city centre. The theoretical model of rent
gradient examines what the rent gradient should look like as a result of
competition from different land uses considering only distance and price, all
other factors remaining constant. Though unrealistic in the sense that it only
considers distance and price, it serves as the basic framework for the real bid
rent gradient. The empirical models are built based on this simple theory
taking multiple variables to calculate the real bid rent gradient and real rent
curve of cities. This theory thus is a crucial tool for the real estate analysis for
understanding the spatial structure of land rent in cities.

10.5.3.1 The Basic Bid Rent Theory

The bid rent theory was given by Alonso and Muth and it explains the
relationship between distance from the city centre and house prices. The
theory states that the rents are bid upwards close to the city centre as
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Resource Planning in households attempt to minimise transportation costs. In simple terms,
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residents living close to the city centre will have to travel less to get work or
entertainment centres and this decreased disutility. Conversely, rents are
lower away from the city centre because transportation costs for residents are
high. Thus, though competition to minimise transport costs, rents become a
negative function of distance from the city centre.

Figure 3.5.1 explains the basic bid

rent function. This model shows that
the rent is highest in the city centre R
and it decreases as one move away en
from the city centre. Residents who t Bid rent Function
live away from the city centre enjoy
lower rent but also spend more on the
transport cost. Similarly residents
living at the city centre or near the
city centre pays higher rent but are
able to save on the transport cost. The
transportation cost is not merely the City centre Distance from the city
money spent; it also involves time centre
and energy in commuting long
distances.

The simple bid curve of Alsono makes three assumptions. Firstly, cities exist
on a featureless plain, without any geographic obstacles like hills and rivers.
Secondly, transportation cost is proportional to the distance travelled and
thirdly, central business district or the city centre contains the vast majority
of employment and other employments are evenly distributed throughout the
metropolitan area. These basic assumptions form the basis of the criticisms of
this theory.For example in real world transport costs are determined by a
complex range of factors and are not proportional to distance. Most cities are
polycentric with more than one city centre whose range of influence
definitely overlaps with one another. Nevertheless, the bid rent theory
demonstrates the nature of the land market and emphasises the notion of
efficiency in the use of urban land.

10.5.4 Significance of Land Rent and Density Gradients

The world population has grown substantially over the last century and so are
the cities. The disparity in density of population of cities over space and time
can mostly be explained by the changing nature and availability of transport
and transport costs. For example, in 18th and 19th century cities developed
around central transportation nodes like railway junctions and ports because
of easy accessibility. Prior to industrial revolution, main mode of
transportation was horse drawn carts which were slow, expensive and
inefficient. Thus location of industries was determined by transport costs as
high cost was involved in moving the good from the raw material site to the
216 factory and from the factory to the market. Along with industrial firms,
 Urban
commercial firms also clustered around the city centre in order to minimize Economics
transportation and communication costs. Consequently, since jobs got
concentrated in one place households also had to locate near the city centres
to access employment. Since in those days only mode of transportation was
horse; both wealthy and poor commuted by horse or by foot. In order to
reduce transport cost, the wealthy started living near the city centre paying
higher rent and poor were pushed to the fringe. That is why the house prices
fell dramatically with distance from the city centre. So, because of
transportation cost, rents changed across space.Therefore, we can say that in
the era of slow transportation, the bid rent gradient of cities was steep and
strongly negative, much like the theoretical model as shown in the figure
above. If nothing had changed since then, we would expect the rent gradient
to be same till this date.

With improvement in transportation, thus bid rent gradient is different in

modern times and urban landscapes of modern cities are dramatically
different. With the emergence of streetcars as mode of city transports which
were relatively cheaper than stagecoach, rich people who could afford this
transport rent started occupying suburban property andmoved away from the
congested city centre while poor still lived in the city fringe. Had streetcars
been affordable to all, rent gradient might have remained unchanged. By mid-
19th and 20th century, rent gradient curve flattened as upper and middle
income citizens chose to move farther away from the city centre. Gradually
the urban spatial structure got increasingly complex making the simple model
of bid rent curve model less effective in predicting real world scenario. Mass
production of cars significantly reduced the transportation costs associated
with living in the city’s periphery further moderating the effect of bid rent
model. We can say that the automobile revolution moderated the bid rent
gradient and made the urban spatial structure increasingly complicated.
Because the modern bid rent gradient is complex, urban economists use
multivariate models to test the existence of bid rent gradient.

10.6 RANK SIZE DISTRIBUTION OF CITIES

If we study the various sizes of urban places in an area or a country, it is
commonly observed that there are a few large cities, many medium sized and
multitude of small centres. This trend is universal and can be observed at
national or regional level. So we can say that the distribution of urban centres
of varying sizes at different distances in a region is said to have certain
relationship between the population size and rank on the one hand and
between the spacing and the hierarchical orders on the other under ideal
theoretical conditions. Here size refers to the population of a city.

To illustrate this, suppose there is a country with 10 cities and a total urban
population of 10 million. If the cities were uniformly distributed then each
city would have had same population which is 1 million. If there is a primate
distribution, then more than double population would have lived in the first
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Resource Planning in largest city than that of the second. If it is an intermediate distribution then
Urban Areas
there will be a ratio between the largest city with all other cities with a steady
decline in population among the cities in between. However we must note
that there is no ‘ideal’city size distribution. However, city size distribution
provides evidences for urban hierarchy in terms of their population size and
in evidently their size of the economy.

10.6.1 Concept ofRank Size rule

The empirical existence of a regular relationship between the size of urban
centres and their ranks was first presented by Auerback in 1913 in a study of
German cities. He was of the opinion that the population of the nth city was
1/nth the size of the largest city. Later on Lotka in 1924 observed that the
urban concentration indicated by the cities of United States fell in the same
pattern. It is a remarkable fact that the distribution of city-sizes exhibits a
degree of regularity across various countries. The rank-size rule was first of
all put scientifically forward by Zipf in 1941 as a theoretical model to express
the relationship between observed and empirical regularity in the size of
settlement hierarchy either urban or rural.This is referred to as Zipf’s Law
where the logarithm of population size when plotted against the logarithm of
the rank of the city produced points close to a straight line, with negative
slope.

The Rank-Size rule is an empirical observation that expresses the relationship

between settlement size (Population) and rank (its numerical position in the
series erected by ordering all the settlements in the system from large to
small. The idea that settlement size and rank have a systematic relationship
was popularized by Zipf, expressed it by simple formula as: Pr = P1/r k , r =
1,2,… Where q is an exponent approximates to unity. This suggest that if the
population of the largest city (P1) is divided by any city in the same region,
the result will approximately be the population of the city (Pr) whose rank
number is used as a divisor. If the population of the largest city is known, the
population of all other cities can be derived from the rank of their size. Thus,
if the largest city has 100,000,00 population the tenth city will have one-tenth
or 100,000 and the hundredth city will have one-hundredth as many or
10,000.

10.6.2 Causes of Rank Size Distribution

Rank size rule in general predicts a distribution of cities in an urban system
which is highly if not completely polarised. This suggests that agglomeration
forces are strong enough to attract a very large proportion economic activity
to the largest city, but not all of it. But because of the negative effects of
agglomeration like congestion many people will prefer to still live in small
and medium towns. This will result in a city size distribution resembling rank
size rule. But the levels of polarization may vary from country to country
depending on several factors like size of the country, political and
administrative factors and economic factors. Big countries tend to have many
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 Urban
large cities whereas small countries tend to have a primate city. Like in small Economics
countries like Bhutan, Sri Lanka, Nepal Thailand etc, their capital cities of
Thimpu, Kathmandu, Colombo, Bangkok form the primate cities. Dictatorial
governments tend to concentrate administrative functions and nationalized
industries in the capital so that they can be easily controlled. Sometimes
cities develop due to historical reasons like cities developed in the colonial
time in India e.g. Kolkata, Delhi and Mumbai are larger than the other cities.

10.6. Rank Size and the Urban Hierarchy

Rank size rule provides an approximation of hierarchy of cities in a country
or an urban system. In a hierarchical urban system, there would not be a
smooth decline in the population of cities with decreasing ranks. Instead there
would be a cluster of cities in similar size groups, or with the number of cities
in each group getting bigger as the population get smaller. This is not exactly
consistent with rank size rule, but a rank size distribution provides a good
approximation of a distribution that is actually hierarchical.

Such urban hierarchy is as a result of several reasons like transportation

hierarchy, administrative hierarchy, and service hierarchy and so on. These
may have overlapping effects on the city size and their distribution.

Check Your Progress Exercise 2

Note: a) Write your answer in about 50 words.
b) Check your answer with possible answers given at the end of the
unit.
1) How does an agglomeration economy influence city growth?
…………………………………………………………………………….
…………………………………………………………………………….
…………………………………………………………………………….
…………………………………………………………………………….
…………………………………………………………………………….
2) Why do cities show hierarchical distribution as explained in rank size
rule?
…………………………………………………………………………….
…………………………………………………………………………….
…………………………………………………………………………….
…………………………………………………………………………….
…………………………………………………………………………….
…………………………………………………………………………….
…………………………………………………………………………….

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Resource Planning in
Urban Areas
10.7 LET US SUM UP
The topic of urban economy is vast. Nevertheless most of the concepts deals
with why cities are formed and how they are arranged in spaced. While the
concept of agglomeration and rank size rule explains the reasons for city
growth and distribution, bid rent curve and rent gradient appreciates the fact
that land being fixed is valuation and is under tremendous competition.
Economics and technological innovations can to a large extent explain the
nature of population distribution in space, but real world scenarios are much
more complex and needs careful considerations.

10.8 KEY WORDS

Economic resources: Resources which have economic value like land,
labour, capital, etc.

Urban Agglomeration: An urban area characterised by high population

density and infrastructure.

Economies of Scale: Advantages which occur when companies incur

profits.

10.9 REFERENCES OR SUGGESTED FURTHER

READINGS
• Hanson, Gordon H. Scale economies and the geographic concentration
of industry. No. w8013. National Bureau of Economic Research, 2000.
• Krugman, Paul R. Development, geography, and economic theory. Vol.
6. MIT press, 1997.
• Leigh, Roger. "The use of location quotients in urban economic base
studies." Land Economics 46, no. 2 (1970): 202-205.
• O'sullivan, Arthur. Urban economics. McGraw-Hill/Irwin, 2007.
• Paul, Catherine J. Morrison, and Donald S. Siegel. "Scale economies and
industry agglomeration externalities: a dynamic cost function
approach." American Economic Review (1999): 272-290.
• Puga, D., 2010. The magnitude and causes of agglomeration
economies. Journal of Regional Science, 50(1), pp.203-219.
• Rosenthal, Stuart S., and William C. Strange. "The determinants of
agglomeration." Journal of urban economics 50, no. 2 (2001): 191-229.
• Schumpeter, Joseph, and Ursula Backhaus. "The theory of economic
development." Joseph Alois Schumpeter (2003): 61-116.
• Tabuchi, Takatoshi. "Urban agglomeration and dispersion: a synthesis of
Alonso and Krugman." Journal of urban economics44, no. 3 (1998):
333-351.
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 Urban
10.10 ANSWERS TO CHECK YOUR PROGRESS Economics

Answers to check your Progress 1

Your answer should include the following points :

1) Adam Smith, basic and non-basic industry, employment

2) Primate city, economies and diseconomies of agglomeration, population
distribution
Answers to check your Progress 2
Your answer should include the following points :
1) Rent, land use, transport, technology
2) Congestion, pollution, employment, agglomeration, economic output

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