| In this thesis, we analyze the effects of public policy on the structure and efficiency of an urban economy. The focus of the analysis is on externalities that are spatial in character, and on public policies designed to correct such externalities. We consider two types of externalities. First, intra-urban externalities distort the spatial distribution of economic activity within the city. Second, inter-urban externalities distort the spatial distribution of activity between cities.;The inter-urban externalities occur in commuter activity. Commuters in the city do not face the marginal social costs of transportation, and inefficiency results. The congestion externalities distort the residents' choices of workplaces, residences, and commuting paths. The first-best policy, a system of congestion tolls, generates substantial welfare gains, as shown in Chapter Four.;There are two inter-urban externalities. First, the production of the city's export good is subject to external scale economies: a larger city allows factor specialization that reduces production costs for all export producers in the city. Second, an external diseconomy of scale occurs in the market for city land. As the city grows, commuting distances and commuting times increase, and marginal entrants to the city face the average, not marginal, costs of commuting. The appropriate public policy for these two externalities is a system of subsidies and taxes on export output. The subsidy/tax program alters city size, moving the economy toward the optimum size, as shown in Chapter Six.;We have designed a general-equilibrium model to analyze the effects of these intra-urban and inter-urban externalities on the structure and efficiency of an urban economy. The general-equilibrium model is designed for the numerical computation of equilibria and optima. The numerical approach allows more realistic modelling of the urban area. The alternative model, the analytical general-equilibrium model, achieves analytical tractability at the cost of realism: the assumptions required for tractability exclude the most interesting features of spatial economies. The basic methodology of this thesis is as follows. We compute equilibria in the urban economy under different policy regimes, and compare the equilibria, focussing on the differences in the structure and efficiency of the urban economy under the different policy regimes. For example, we compare the market equilibrium, in which congestion externalities are unpriced, to the optimum, which results from the optimum pricing of transportation. |
