TAILIEUCHUNG - A Companion to Urban Economics - Arnott and McMillen - Chapter 7

C H A P T E R S E V E N Space in General Equilibrium INTRODUCTION How do households distribute themselves in a spatial dimension? Do they distribute themselves efficiently? What determines land-use patterns? | A Companion to Urban Economics Edited by Richard J. Arnott Daniel P. McMillen Copyright 2006 by Blackwell Publishing Ltd CHAPTER SEVEN Space in General Equilibrium Marcus Berliant and Courtney LaFountain Introduction How do households distribute themselves in a spatial dimension Do they distribute themselves efficiently What determines land-use patterns Standard intermediate microeconomic theory is ill equipped to answer these questions because households and others using land care about the location as well as the quantity of land that they consume. As a result some of the standard assumptions used in our models lead to predictions that are inconsistent with observed behavior. For example suppose that households like to consume land and a composite consumption good a bundle of everything that is not land . A key assumption in standard microeconomic theory is that preferences are strictly convex which implies under symmetry of preferences that households prefer owning an acre of land and a unit of composite good to owning two acres of land and no composite good or to owning two units of composite good and no land all else being equal. However if households care about the location of the land they consume then land in the city and land in the suburbs are essentially two different goods. In this case convex preferences and symmetry imply that households prefer owning one acre of land in the city and one acre of land in the suburbs to owning two acres of land in the city and none in the suburbs and to owning two acres of land in the suburbs and none in the city. In general households will want to diversify their landholdings. This is inconsistent with observed behavior. To answer the questions we have posed we turn to the Alonso 1964 model and rely on Berliant and Fujita 1992 for an analysis of it. This model is a straightforward extension of standard microeconomic theory to urban economics that includes land as a commodity while at the same time incorporating .

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