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Agglomeration Externalities and Urban Growth Controls

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  • Wouter Vermeulen

Abstract

Should constraints on urban expansion be relaxed because of external agglomeration economies? In a system of heterogeneous cities, we demonstrate that second-best land use policy consists of a tax on city creation and a subsidy (tax) on urban development in cities in which the marginal-average productivity gap is above (below) average. However, the implementation of this policy requires coordination at the system level. A tax on city creation does not raise welfare if development taxes are set decentrally by competitive urban developers, nor does correction of these taxes raise welfare if a tax on city creation is unavailable. In the resulting constrained optimal allocation, urban development is subsidized in all cities. The quantitative significance of these findings is explored in an application of our model.

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Bibliographic Info

Paper provided by Spatial Economics Research Centre, LSE in its series SERC Discussion Papers with number 0093.

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Date of creation: Oct 2011
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Handle: RePEc:cep:sercdp:0093

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Web page: http://www.spatialeconomics.ac.uk/SERC/publications/default.asp

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Keywords: Agglomeration externalities; growth controls; second-best policy; systems ofcities;

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Cited by:
  1. Jan Rouwendal & Wouter Vermeulen, 2012. "A Note on the Value of Foregone Open Space in Sprawling Cities," SERC Discussion Papers 0101, Spatial Economics Research Centre, LSE.

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