ECON 2400 : Ch5_solution.pdf
Document Summary
Problems: although we often think about the negative externalities of congestion and pollution in cities, there may also be some positive externalities. A concentrated population is better able to support the arts, professional sports, etc; cities typically have a greater variety of good restaurants and so forth. Perhaps a more basic issue is that there may be some increasing returns to scale at low output levels that make industrial production more costly in small towns. There may also be externalities in production in being located close to other producers. One example would be the financial industry in financial centres like new york, london, and tokyo. Another example would be large city medical centres that enhance coordination between primary physicians and specialists. One market test of whether productivity is higher in cities would be to look at the wages in cities versus the wages in smaller towns and rural areas. Wages are often higher in cities for individuals of comparable skills.
