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Agglomeration externalities and urban growth controls

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  • Vermeulen, Wouter

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.

Suggested Citation

  • Vermeulen, Wouter, 2011. "Agglomeration externalities and urban growth controls," LSE Research Online Documents on Economics 57852, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:57852
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    File URL: http://eprints.lse.ac.uk/57852/
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    Cited by:

    1. Behrens, Kristian & Robert-Nicoud, Frédéric, 2015. "Agglomeration Theory with Heterogeneous Agents," Handbook of Regional and Urban Economics, in: Gilles Duranton & J. V. Henderson & William C. Strange (ed.), Handbook of Regional and Urban Economics, edition 1, volume 5, chapter 0, pages 171-245, Elsevier.
    2. Jan Rouwendal & Wouter Vermeulen, 2012. "A Note on the Value of Foregone Open Space in Sprawling Cities," SERC Discussion Papers 0101, Centre for Economic Performance, LSE.

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    More about this item

    Keywords

    agglomeration externalities; growth controls; second-best policy; systems of cities;
    All these keywords.

    JEL classification:

    • R12 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - Size and Spatial Distributions of Regional Economic Activity; Interregional Trade (economic geography)
    • R13 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General Equilibrium and Welfare Economic Analysis of Regional Economies
    • R52 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Regional Government Analysis - - - Land Use and Other Regulations

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