Policy Studies Review, Vol. 3, No. I, August, 1983

A . P O L I C Y S C I E N C E S AND PRODUCTION OF USABLE I N F O R M A T I O N

THE RELEVANCE OF URBAN ECONOMIC THEORY TO URBAN P O L I C Y A N A L Y S I S Harry Richardson

In the 1970s. a revolution took place in the urban economic analy- sis. Urban economics became an acceptable part of economic theory, instead of a mish-mash of urban land economics, applied microeconomics, and ad hoc generalizations from both deductive and inductive reasoning. This revolution, called the New Urban E C O ~ O ~ C S , ~ was beneficial intellectually because it brought a lost stray back into the fold. Papers published in urban economic theory became recognizable as they drew on the standard microeconomic model of individual utility maxi- mization and placed it in a spatial context. These contributions also adopted standards of. formalization. elegance, and mathematical rigor comparable to research efforts in mainstream economics. However. these intellectual gains were not achieved without cost. The assumptions needed for mathematical tractability made the "city" an abstraction that bore little resemblance to cities in the real world. Of course. econom- ic theory must pare down complex reality to its bare elements. In this case, however, the criterion for simplification appeared to be the requirements of the mathematics, not the most concise representation of the real world. The result was that as the models become more rigorous they became less useful for deriving policy implications. To those, like myself, attracted to urban economics because of its strong policy orientation, this was no minor drawback. While some of the new urban economists have been very ingenious in stretching their models to handle a wide range of policy problems, the results have been somewhat unsatis- factory because of the limited types of policy instruments that can be accommodated within the standard model. Hence, despite the academic glamour associated with these new trends in urban economic theory, it is arguable that urban economics in the last decade and a half has been running on the wrong track.

Virtually all "new urban economic" (HUE) models are derivatives of the so-called standard monocentric model. This is based on the assump- tion that the city is circular shaped. like a doughnut, with the hole representing the CBD (central business district) and the dough repre- senting a suburban residential ring. This implies "exclusive zoning." 1.e.. all jobs are located in the CBD and all homes in the surrounding ring. Hence, workers have to commute to their jobs. usually by the most direct route, which implies a dense network of radial roads. Another key assumption is that households choose where to live by trading living space for commuting costs. This "trade-off" model of residential location (Alonso, 1964) means that location rent is determined solely by travel cost savings, a very old idea that can be traced back to von Thunen (1826). This simple view of residential locational behavior ignores all other considerations such as access to local public goods (e.g., good school districts, and so forth). Another critical assump- tion is that urban capital is perfectly malleable and mobile. In other words. location decision-makers are not constrained by existing struc- tures atd infrastructure. All sites are available for occupation, and the adjustment from one equilibrium to another is instantaneous.

There are many variants of the monocentric city model. One of the simplist is based on the assumption that the city contains a given number uf households that are identical in income and tastes. each with one worker. Each household maximizes its utility function (the argu- ments of vhich are housing space, other goods and services-called composite consumption--and distance, which is entered negatively to reflect the assumption that commuting is costly and burdensome) subject

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46 Harry Richardson

to income constraints. In addition to the standard utility maximization conditions, this model has a locational equilibrium condition, namely that any slight change in rent associated with moving is exactly offset by an identical change in commuting costs. This means, of course, that no household can be made better off by moving. Obviously, any equilib- rium rent gradient that satisfies this condition must be negatively sloped. Households who live further away from the CBD have to be compensated for the expense and disutility of additional commuting by much lower site rents.2

This simple model has been expanded and elaborated in a variety of ways. Only a few illustrations can be given here. Beckmann (1969), Wheaton (1977) and others have introduced income differences among households. The standard result is that the rich live further away from the city center than the poor. However, Wheaton suggested that, empiri- cally, household characteristics such as age of head of household and family size may be more important than income levels. Also, the subur- ban rich result may not hold if time costs are included in the measure- ment of commuting cost (Solow, 1973a; Oron. Pines and Sheshinski. 1973; Robson. 1976). In this case, if the value of travel time increases with income, economizing of travel time may be more important for the rich than their demand for more housing space, and, as a result, they may locate centrally. This idea has been used in explanations of the gentrification phenomenon.

The introduction of travel time has an even more important implica- tion. resulting from the fact that it makes traffic congestion one of the determinants of household welfare. In the absence of congestion tolls, the application of standard cost-benefit rules will lead to excessive investment in new highways and a sub-optimal suburbanized pattern of development. Optimal congestion tolls equal to the marginal social cost of using roads, on the other hand, will result in an optimal urban spatial structure. This optimal city will be more dense, but household utility levels will be higher if revenues from the congestion tolls are redistributed. This argument is very important in an urban policy context. It suggests the city that develops from the operation of market forces may be non-optimal and it points out that pricing strategies may be deployed to achieve optimality. Thus, road congestion charges are one specific example of a broader class of policy inter- ventions suggested by the NUE models. This point is critical to an appraisal of the policy relevance of these models, so I will return to it later in this paper.

In the search for an optimal city, other theorists (Mlrrlees, 1972; Riley, 1973) have examined the spatial structure that maximized some predetermined social welfare function. The paradoxical result of this line of research was to show that welfare would not necessarily be identical at all locations. even if all individuals are given equal weight in the social welfare function. The disturbing implication. at least for utopian social engineers, is that neither maximizing acces- sibility nor improving spatial arrangements can be expected to solve all the problems of redistribution. even in the most equity-oriented of societies. No one has given a satisfactory explanation of the finding that welfare may differ with location, but the most promising line of inquiry is that it may be related to what is called the nonconvexity problem, namely that households can reside at only one location rather than simultaneously living at many (Levhari, Oron and Pines, 1972).

Several other modifications to the standard model involve relaxing the restrictive assumptions associated with the trade-off model of residential location. ?or instance, households may prefer lower neigh- borhood densities (independently of a preference for a larger dwelling lot) and high levels of environmental quality. This could raise subur- ban rents high enough to turn the rent gradient positive at some dis- tance from the CBD (Rf-nardson, 1977b). or racial residential

preferences may depress rents close to neighborhoods dominated by members of another race, and this could override the demand for CBD accessibility close to central city minority ghettos (Rose-Ackerman. 1975). Public goods could be introduced by allowing public services at each location to be an argument of the utility function and by including the property tax rate explicitly in the budget constraint (Polinsky and Rubinfeld, 1978). The influence of air pollution on locational choice may be analyzed by including the level of air quality in the utility function. Locations suffering from exposure to above-average levels of pollution will obviously exhibit lower rents, but a problem with determinacy arises because exposure to pollutants could also be reflected in high wages (the "compensating payments" hypothesis). Resolving this problem would be complicated. It would require a general equilibrium model of the city in which labor (and commodity) markets are specified as well as the land market (Polinsky and Rubinfeld, 1977).

This brief sample of extensions to the standard monocentric model is far from comprehensive. but it gives some idea of the scope of such models. This field of research has undoubtedly been a shot in the arm for urban economic theory. It has shown how general and important results can be derived from simple and elegant models. However, from the point of view of this paper, the criterion for evaluation of this research is not its analytical clarity, but its policy relevance. On this score, these models have undoubted shortcomings.

An obvious criticism of the NUE models is that the monocentric doughnut, with its rigid separation of land uses, strict circular shape, and ubiquitous radial transport network, bears almost no resemblance to a modern city. This argument is not necessarily compelling, however. The strict assumptions help to ensure mathematical tractability. It does not always follow that the results fail to hold when the assump- tions of the model are relaxed. For example, introducing a limited number of high-speed radial corridors converts the circular shape of the city into a star but changes the results very little. Allowing for a rectangular grid street network ("block metric") leads to a diamond city (Richardson and Anjoprani. 1981).

The model is more suspect from the point of view of characterizing the policentric spatial structures found in most large American cities and in the world giant metropolises. It may be possible to model the policentric metropolitan region as a system of interrelated monocentric cities, each with its own central workplace and "captive" labor force in the surrounding ring up to an indifference boundary beyond which an adjacent employment center exerts a magnetic pull on commuters. But such a model demands as a central assumption that workers work in the nearest employment center, a hypothesis consistent with economic effi- ciency but patently unrealistic. If we wish to allow for cross- commuting and for the extreme diversity of non-vork trips in a poli- centric metropolitan area, this is easier to achieve with a computer simulation model than with a multicentric version of the basic NUE model. Moreover, the static nature of the NUE monocentric model is a major liability in the analysis of the policentric city because the latter is the result of a dynamic process in which new subcenters appear as the city expands. The explanations of subcentering by urban econo- mists (e.g., Lave, 1974; Miyao, 1977) do not draw upon the standard NUE model. Instead. they shov that subcentering is the result of a trade- off between agglomeration economies (increasing returns to production) and congestion costs, especially in transportation. Interestingly, their research shows that a system of multiple employment centers ie more efficient than a bipolar system csnsisting of the CBD and a single secondary center.

The weaknesses of the NUE models for policy analysis are aggravated by their limited and passive role for the public sector. In some NUE models, public services and taxes are intrrauced to reflect the Tiebout

48 Harry Richardson

hypothesis that the local tax-service mix affects residential location behavior. but there is no example of a NUE model that shows how local governments can actively intervene to improve welfare. Ideally, a model is required that carves up the metropolitan region into discrete politi- cal and fiscal jurisdictions. But partitioning of this kind implies discontinuities in tax rates and public service levels at local govern- ment boundaries, and this important bit of realism destroys the continu- ous functions that are so central to the monocentric model. Again, a computer simulation model is a better bet for handling discrete fiscal jurisdictions within metropolitan regions. More generally, the main reason why the public sector is almost invisible in NUE models is that its objectives and behavior are difficult to represent within the framework of neoclassical models of competitive equilibrium such as the NUE models.

The NUE models are appropriate for dealing within one broad class of policy interventions, namely the use of pricing strategies to correct for non-market externalities. The most common examples, in theory if not practice, are direct road pricing in the form of congestion tolls to reduce traffic congestion (Oron, Pines and Sheshinski, 1973; Henderson, 1974) and emission fees to control air pollution from automobiles (Fisch, 1974; Oron. Pines and Sheshinski, 1974) or stationary industrial sources (Strotz and Wright, 1975; Oron and Pines, 1975). Such taxes not only correct for the externality, they also change the spatial structure of the city. For example, both congestion tolls and automobile emission fees make the city more compact while taxing fixed-source pollutants at the city center encourages suburbanization. In fact, the novelty of this type of policy research is solely to translate well known policy prescriptions derived from standard applied microeconomics into a spatial context. A problem with these pricing strategies is, while they are theoretically impeachable. they are rarely implemented because of assumed difficulties in political acceptability and enforcement. The notable exception to this generalization. the common phenomenon of tolls on roads and bridges. is rarely a true application of the approach since toll charges usually remain the same regardless of traffic conditions. Hence, they are more of a revenue-raising device than congestion levy. Exemption from the toll for carpools, where it occurs, is usually the only concession to the congestion argument.

It is not eaay to evaluate the practical arguments against the adoption of pricing tools as the dominant urban policy instrument. There are undoubtedly technical difficulties in the way of measuring the marginal social costs of, say, air pollutants at different locations and in a variety of atmospheric conditions, but there are rough-and-ready approaches to resolve these problems in at least a crude way (e.g.. a pricing-cum-standards approach; Baumol and Oates, 1971). The inability of politicians to support unpopular policies (and most taxing strategies are increasingly unpopular) is not a very strong stick with which to beat the NUE modellers. Nevertheless, political feasibility is an important element in policy analysis. For the most part, the policy prescriptions of the monocentric city theorists have been cries in the wildernesa.

Not only are the policy prescriptions of NUE models almost all restricted to pricing devices. but their implications for a city's spatial structure are very general. For example, it is not enough to say that the impoaition of congestion road pricing would reduce the size of the city. The policymaker and the planner needs to know precisely how the spatial structure of the city would change and over what time period. This would require experimentation with parameter values and detailed specification of the transportation system. NUE models are not auited to this task.

Of course, these criticisms of the policy relevance of NUE models would be weakened if there were no alternative approaches available. In

Relevance o f Urban Economic Theory to Urban Policy Analysis 49

fact, I would argue that further work on system-simulation models is a much more fruitful line of inquiry, at least for the purposes of urban policy analysis. These computer simulation models may lack the elegance of NUE models, and their key relationships may be blurred because "no one can fully understand what is happening in the bowels of the machine" (Solow. 1973b, p.267). But they have many offsetting advantages. They can represent individual real-world cities via the specifications of parameter values. They can simulate complex behavior that goes beyond the narrowly economic responses assumed in variants of neoclassical theory; for example, they can model the public sector and its policy objectives. In many contexts, they offer scope for policy experimenta- tion without having to undertake on-the-ground investments. For in- stance, it is possible to predict the impacts of a subway system via incorporation of the "abstract mode" model of transportation (Quandt and Baumol, 1966) without having to build the subway itself. Historically, progress in the development of computer models has been hindered by their high cost, but. in recent years costs have been falling rapidly except for the human resources involved. It is possible that these models have been less than popular with economists because they do not have a monopoly in their use. On the contrary, economists have often been employed in relatively subordinate positions, such as in providing econometric estimates to use as plausible parameter values.

A satisfactory urban economic model that would be helpful for policymakers has several requirements. It should probably be discrete rather than continuous to make it easier to model the dynamics of subcentering and policentric development and to accommodate intrametro- politan fiscal jurisdictions. It needs to allow for multiple land uses with a wide variety of site and accessibility characteristics and to be able to explain the process of land-use competition (e.g.. the invasion of residential sites by non-residential activities). An acceptable model should include major constraints on market forces, such as the occupation of site by non-malleable structures, zoning and land-use controls. locational inertia and relocation costs, and market imper- fections (e.g., residential segregation by race, spatial differentials in environment quality, and locational interdependencies). Of course, a trade-off exists between the complexity involved in a better representa- tion of reality and simplicity. A model cannot, and is not intended to, replicate reality. But an economic model for urban policy analysis has to incorporate some of the elements that affect the efficiency and Implementability of policy interventions. NUE models are just too abstract. The computer simulation models, on the other hand, are very flexible. Even their data requirements need not be massive since they can use assumed but plausible numerical values for parameters that cannot be estimated econometrically.

Not all urban problems require a policy approach directed towards the spatial structure of cities. Urban poverty, for example, is much better attacked with nationwide income maintenance strategies than with place-specific programs targeted at poverty areas within cities. Although almost every urban-oriented policy (indeed, any economic or social policy) has implicit spatial impacts; there are some types of urban policy (e.g.. transportation. infrastructure and public service provision. congestion and pollution controls) that cannot be designed effectively without explicitly involving a spatial perspective. For such policies it is necessary to have a framework for spatial analysis. a theory of urban spatial structure and/or an operational and spatially disaggregated urban model. The most representative examples of these alternatives are the NUE models and metropolitan area simulation models. These alternatives could be concidered complementary if the NUE models are used for deriving general insights, such as the conditions under which welfare levels might vary over space or how unfettered market forces might result in suboptimal spatial structures, while the

50 Harry Richardson

simulation models are used for testing the effects of specific policies whether in terms of choice of alternative instruments or in determining the appropriate intensity of one instrument. However, sole reliance on NUE models for urban policy analysis is much too limiting because it restricts the policy analyst to a narrow class of policy tools, the use of which often requires a trade-off between theoretical soundness and implementation difficulties. The achievements of NUE models have been a sharpening of the formal rigor of urban economic theory, but they have diverted the attention of academic urban economists from the practical problems associated with the design and implementation of effective urban policies.

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FOOTNOTES

Space prevents a detailed discussion of all the developments in new urban economics. My book (Richardson. 1977a) provides a detailed overview, at least up to 1976. The name of new urban economics can be traced to Mills and MacKinnon (1973).

I am assuming that many readers of this journal are not concerned about the mathematical details of this model. For those vho are, a clear exposition may be found in Wheaton (1979).

The only way of representing a sub-center in the standard mono- centric model is by a "blip" on the rent gradient. In areal terms this implies an annular ring vhich is hardly consistent with spatially clustered agglomeration economies that are considered important in explanations of subcentering. The only vay of making sense of an annular ring "subcenter" is as commercial strip devel- opment along a circumferential highway.