Urban Multifunctional Land Use and Externalities

A recent planning devise aimed at dealing with land scarcity is the propagation of multifunctional land use. Multifunctional land use can generally be defined as the combination of different socio-economic functions in the same area. The goal of Multifunctional Land Use (as a planning concept), just like New Urbanism, Smart Growth and the Compact City Concept, is to save scarce space by intensifying the use of space. Before we can assess the social desirability of multifunctional land use projects, we need to answer the question as to why various activities cluster in space, and what types of synergy might arise from such clustering. We do so by addressing multifunctional land use as an empirical phenomenon instead of a planning concept. Although multifunctional land use encompasses more than the clustering of economic activities, for example also the allocation of land use claims made by housing, transport, water, recreation and nature, in this paper we focus on the economic effects of the clustering of economic activities. We do so by focusing on the concept of agglomeration economies in general and ‘returns to diversity’ in particular. By means of a simple spatial-economic model we show the spatial equilibrium impacts of the existence of multifunctional land use. The model investigates market failures that may hamper the spontaneous emergence of optimal activity mixes in spatial clusters, and addresses the question of whether private monopolistic development of multifunctional sites would by-pass such market failures. Keywords: Agglomeration, competitive advantage, economies of scale, economies of diversity, multifunctional land use.