TAILIEUCHUNG - A Companion to Urban Economics - Arnott and McMillen - Chapter 1

C H A P T E R O N E The Micro-Empirics of Agglomeration Economies Stuart S. Rosenthal and William C. Strange INTRODUCTION Economics is the study of the allocation of scarce resources. Urban economics focuses on the allocation of resources across space. | A Companion to Urban Economics Edited by Richard J. Arnott Daniel P. McMillen Copyright 2006 by Blackwell Publishing Ltd CHAPTER ONE The Micro-Empirics of Agglomeration Economies Stuart S. Rosenthal and William C. Strange Introduction Economics is the study of the allocation of scarce resources. Urban economics focuses on the allocation of resources across space. In considering this sort of resource allocation a striking fact becomes apparent immediately economic activity is highly concentrated. More than 75 percent of Americans live in cities as they are defined by the US Census Bureau and yet these cities occupy only 2 percent of the land area of the lower 48 states. This story is not unique to the United States. Capital and labor are highly agglomerated in every developed county and they are increasingly agglomerated in the developing world. It is not just aggregate activity that is agglomerated. Individual industries are concentrated too. The top panel of Figure for instance presents the density of employment in the wine industry SIC 2084 . As is well known most of the country has little employment devoted to wine production. The most significant exceptions are California Eastern Washington and New York State especially in the Finger Lakes region. The forces contributing to the spatial concentration of wine industry employment in these regions are not hard to grasp. All three regions have climates that support the growing of grapes. Because grapes are perishable wine makers locate production facilities close to the source of the grapes in order to reduce transportation costs. If the location of the wine industry seems easily explained the bottom panel of Figure presents more of a challenge. It shows the spatial concentration of the software industry SIC 7371-3 7375 . Although this is an activity that could L S. S. Rosenthal and W. C. Strange Figure Employment in the wine SIC 2084 and computer software SIC 7371-3 7375 industries. The .

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