2. An argument for active local economic development policy is that there are in
ID: 1205098 • Letter: 2
Question
2. An argument for active local economic development policy is that there are increasing returns to scale in local labor markets. Therefore, there are local spillover benefits from attracting more jobs. (This applies particularly to high skill jobs, but let’s abstract from that). A related argument is that urban transportation infrastructure investment is important for attracting jobs. Assume both are correct (FWIW, I think they are). It is common to use high congestion as an indicator that more investment in transportation infrastructure is needed. In this question, you will analyze whether using congestion as an indicator of the need for more transportation infrastructure investment is logically consistent with the two previous arguments.
Assumptions and Notation
1) The inverse supply of labor is w = r + c + n, where n is the number of workers, w is the wage rate, r is the cost of a residence with access to the city, c is the disutility, or cost, of congestion, and is the slope of inverse labor supply. Higher wages are required to attract more workers to the city all else equal, so > 0. Since the city is a tiny fraction of the entire world from which workers may be attracted, may not be much greater than 0. The higher rent or congestion, the higher wages must be to attract a given number of workers.
2) The rent gradient, or inverse housing supply, is r = n where > 0 reflects an upward sloping supply of accessible housing. Rents accrue to non-workers—a development corporation.
3) The disutility of congestion is c = n where > 0 reflects the contribution of another worker to congestion. Investments that lower congestion holding n constant reduce .
4) The demand for workers is perfectly elastic at w = p, where p is worker productivity.
5) Productivity is p = + n. Increasing returns to labor market size means > 0. Intuitively, > 0 is the city’s productivity before the onset of limits to accessible housing, congestion, and increasing returns to city size. If that is not positive, no one comes to the city to begin with.
6) Increasing returns to scale don’t overwhelm the collective forces of rising congestion, rising rents, and upward sloping labor supply, so wage increases needed to attract additional workers all else equal, so + + >
a) Solve for equilibrium city size and congestion, ne and ce, as functions of , , , , and .
b) Suppose an increase in investment in infrastructure reduces . What happens to equilibrium city size and congestion? That is, what are the derivatives of ne and ce w.r.t. ?
c) Consider the usefulness of congestion as a measure of the efficiency of transportation investment in light of the results of part b. Hint: + - should be important in your answer. Recall it is entirely plausible for to be only slightly positive.
Explanation / Answer
http://link.springer.com/book/10.1007/978-1-4020-5318-4
Book
The Economics of Non-Market Goods and Resources
Volume 7 2007
Environmental and Resource Valuation with Revealed Preferences
A Theoretical Guide to Empirical Models
Interaction
dugi-doc.udg.edu/bitstream/handle/10256/3202/NBoccard.pdf?...
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