Real Estate Economics 156

Location of Economic Activity

Two types of transportation costs.

Procurement cost: shipping inputs to the firm.

Distribution costs: shipping output to the market.

The monetary weight of input: weight * cost/mile

Procurement costs : weight * cost/mile * distance

Distribution costs: weight * cost/mile * distance

Optimal locations at source of inputs or at market.

Terminal costs: loading and unloading.

Often decreasing shipping cost with distance.

Central Place Theory

Different types of firms have different market areas.

Large cities export to smaller cities.

Producers prefer to locate in large markets to minimize distribution costs.

But markets are large already because other firms located there.

So growth becomes self-sustaining.

Historical and arbitrary events can determine the initial location of a city. Policy then influences its growth.

Johannisburg, South Africa, became the major city, even though Cape Town had the earlier start and favorable location.

Johannisburg's property tax was only on land, and Cape Town taxed improvements as well. Cape Town recently switched to only taxing the land value.

Location can be determined by the principle of median location.

Optimal location divides the monetary weight into halves.

Places that are already large maintain a size advantage.

Land speculation can drive the price of land so high that business locates elsewhere, as happened in Washington DC in the 1800s.

Taxing the rent and untaxing the buildings eliminates this distortion.