Urban policy (spatial policy -to reduce spatial inequality-):
summary
Urban policies affect the geographical distribution of economic activities.
3 types: regional place-based policies, urban renewal, and land use
regulations.
Location-based subsidies have enhanced the earnings of disadvantaged
workers in targeted areas the US.
On a smaller spatial scale, we discuss housing externalities and urban
renewal policies, including the Krachtwijken-program in the Netherlands
and subsidized housing construction in the US. (these local policies are
likely to fully capitalize in land rents)
the impact of land use regulations on cities through a two-location model,
outlining three effects: the supply effect, the internal effect, and the
external effect.
Why do we have disparity?
The interaction between increasing returns and transportation costs
results in an inherently uneven geographical distribution of economic
activities at different geographical scales. These spatial disparities could
raise concerns, given that individuals are not perfectly mobile and one’s
place of birth can significantly impact life prospects (Chetty et al., 2014).
3 types (continued):
(i) place-based policies affecting the labour market and location
choices across different types of locales.
Most economists have been critical towards place-based policies because
governments should ‘help people rather than places’, and ‘not bribe people to
remain in unattractive places’. However, there are two broad normative
reasons: to improve efficiency and to improve equity.
Place-based policies focus on geographic areas rather than individuals,
aiming to improve equity (helping disadvantaged residents) and efficiency
(correcting market failures). However, subsidies in declining regions may
mostly benefit landowners due to rising rents, rather than improving
residents’ welfare. In terms of efficiency, these policies can address market
failures by funding public goods (e.g., transportation, parks) and managing
spatial externalities (e.g., knowledge spillovers, crime). However, they may
not always increase overall welfare if they simply shift benefits between
regions rather than creating net gains.
Examples: tax breaks, wage subsidies, investments.
(ii) (urban renewal and housing externalities.
(iii) Land use regulation affecting the quality of the built
environment.
Land use regulations are another example of policies inherently tied to
specific locations. Land use regulations refer to a set of rules, guidelines, and
policies established by governments to govern how land can be utilized within
particular geographical areas. These regulations are designed to reduce
negative (land use) externalities and improve the quality of the built
environment – a local public good.
Examples: zoning ordinances, building codes, density and height
restrictions, historic district preservation, and environmental protections.
dn represents a small unit of population (or housing unit) over which
we integrate.
The integral calculates total landlord income by summing over all
residents in the region.
It ensures that the equation accounts for all rental income collected
from LiL_iLi residents.
QUESTION: DIFFERENCE BETWEEN V and (εi(ω)
Who Are Inframarginal Workers?
Inframarginal workers are those who strongly prefer one region over
the other, regardless of small changes in wages or amenities.
They are not on the margin of migration; instead, they derive a
positive surplus (extra utility) from living in their preferred region.
In Figure 12.1, worker surplus is shown as the shaded blue area.
Who Is the Marginal Worker (Li∗?
The marginal worker is the worker at Li∗ who is indifferent between
living in region iii or region j.
Any small change in wages or costs can shift their decision to move.
2. Surplus Distribution to the Left and Right of Li∗
To the left of Li∗:
oThese workers have a strong preference for region i.
oThey would never leave region iii unless conditions changed
drastically.
oTheir surplus is positive because they get extra utility from living in
iii.
To the right of Li∗
oThese workers prefer region j.
oThey stay in j unless wages in i rise significantly.
oTheir surplus is positive in j because they prefer to stay there.
Housing supply elasticity (σi) significantly influences the effects of labor
subsidies. When housing is inelastic, the cost of living rises sharply,
reducing the real benefits of the subsidy. Additionally, the subsidy creates
deadweight losses due to taxation, as price distortions misallocate
workers between regions. Migrants moving for subsidies do not gain
additional welfare but increase the overall tax burden on society.
These deadweight costs are proportional to migration responses
(Li/dθi) and decrease when workers are less sensitive to wage or amenity
changes (ν→∞). This leads to a paradox: the most efficient place-based
policy is one that does not trigger migration, as it avoids inefficiencies
and simply raises local earnings without distorting labor markets. This
underscores the equity-efficiency trade-off: the optimal subsidy boosts
wages without affecting worker mobility or job creation.
12.2.4 Place-based policies and local amenities
Place-based policies can take the form of investments in local amenities that
raise the welfare of local residents. If these amenities are non-congestible
and do not imply ongoing maintenance costs, investments in local amenity
levels will avoid the deadweight losses associated with labor subsidies
because workers’ mobility will not directly impose additional costs on
taxpayers.
whether the amenity policy leads to an improvement in overall welfare does
not significantly depend on workers’ mobility. This is because subsidizing
local amenities does not impose any direct efficiency costs as long as these
amenities can be produced at a sufficiently low cost by the government.
Place-based policies and agglomeration economies
In summary, the welfare analysis concludes that the EZ program has effectively
redistributed income to a specific localized labor force, with relatively minor
deadweight losses, aside from the typical expenses associated with funding the
subsidy itself. The reason is that few people move, which limits the potential for
deadweight losses. The study also highlights that in evaluating place-based
policies more detailed data is warranted as to make more precise statements
and draw stronger conclusions.
12.4 Housing externalities
Because homeowners do not take into account the benefits of maintenance on
their neighbors into account, the maintenance level observed is likely below the
optimum. Hence, this could serve as a justification for why local governments
might want to implement place-based initiatives aimed at enhancing local
housing quality.
Rossi-Hansberg et al. (2010)
Land rents increase as a result of place-based housing investments.
Even if we change the way housing services are modeled (additive vs.
multiplicative), increased housing services always capitalize into land values.
Landlords benefit the most, as rental income increases without additional
costs to them.
12.5 An illustration: Housing externalities and affordable housing
12.5.1 Urban renewal and public housing in the Netherlands
By looking at the change in prices of owner-occupied housing units that were not
part of the program, Koster and Van Ommeren (2019) aim to identify external
effects of the KW scheme.
Recall that a major issue in evaluating place-based policies is that targeted
neighborhoods are not chosen randomly but are specifically selected because of
undesirable characteristics. To address this issue, they employ a method that
adopts a repeat-sales estimation approach. The repeat sales approach implies
that all time-invariant characteristics of properties and neighborhoods are
controlled for. Still, it may be argued that price trends in targeted and non-
targeted neighborhoods are different, e.g. because of gentrification and sorting,
or changes in endogenous amenities and/or
public goods over time.
Koster and Van Ommeren (2019) therefore combine the repeat-sales approach
with a regression discontinuity design, utilizing information related to eligibility
criteria for receiving investments. The eligibility criterion implies that
neighborhoods will receive grants if they have deprivation scores exceeding a
certain threshold.
