Agglomeration Diseconomies – Definition

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Agglomeration Diseconomies Definition

An urban agglomeration is an urbanized area or human settlement that is typically characterized by vast spans of human-made surroundings and a high density of population. Agglomeration diseconomies refer to the economic inefficiencies that stem from agglomeration, such as high cost of living, shortage of biosphere reserves, and corruption, among others.

However, a macroscopic analysis of urban agglomeration fails to delve into the intricacies of economic inefficiencies that affect particular cities. For example, the diseconomies of agglomeration in a city with a lower density of population such as Los Angeles would be vastly different from the diseconomies associated with more densely populated cities, such as New York.  While higher transportation costs constitute a significant proportion of the diseconomies associated with agglomeration in Los Angeles, cost of housing is a far more important criteria in New York.

A Little More on What is Agglomeration Diseconomies

Housing costs are the most prominent of all expenses associated with agglomeration. In fact, such expenses constitute almost a third of total household expenditures. However, there is a noticeable difference between cost of housing in major cities and that in smaller towns and urban centers. Moreover, city dwellers are much more likely and seem much more willing to spend a greater proportion of their incomes on housing, compared to their counterparts in semi-urban or rural areas. Land regulations often determine the availability of housing facilities in a city, and thus, play a vital role in determining housing prices. Cities such as London have enforced stringent land regulations, which has resulted in limited availability of land. This has invariably turned London into one of the most expensive cities to buy housing anywhere in the world. Recent studies have been able to correlate the enforcement of more flexible land regulations with a much slower escalation in housing prices over large periods of time.

Secondly, higher costs of mobility are often associated with large urban agglomerations. In fact, mobility cost is one of the primary determinants of a property’s value – the closer the property is to the amenities of a city, the higher is its valuation. This is because, in a real word scenario, the time taken for commuting is inversely proportional to the time availability for productive work – the higher the time spent in travel, the lower is the time available for productive work. Therefore, from an economic standpoint, every additional hour spent in travel is equal to one paid hour deducted from the day’s work.

Thirdly, the rate of crime is typically higher in cities than in semi-urban or rural areas. Economists have derived a positive correlation between the size of a city and the crime rate. As a corollary, higher rates of crime result in higher expenditures incurred for the purposes of security.

Lastly, exposure to higher levels of pollution is another tradeoff of residing in an urban agglomeration. The World Health Organization (WHO) conducted a study of pollution in urban areas and concluded that an astounding majority of residents of agglomerations were liable to suffer the perils of extremely high pollution levels. However, WHO also noted that because of a greater focus on environmental safety and health control in more advanced economies such as the United States and countries in Western Europe, the levels of air pollution in those countries were actually lower than in lesser developed countries. Thus, it is safe to conclude that with further economic growth, developing economies stand a good chance of improving their air pollution levels.

Advancements in technology in the coming years are expected to further curb agglomeration costs. A case in point is the current development of smart cities – urban zones that have integrated electronic and digital technologies in municipal services such as waste management and pollution control, traffic control and public transportation. Smart cities are expected to bring about a noticeable reduction in transport, pollution and security costs for their residents.

References for Agglomeration Diseconomies

Academic Research on Agglomeration Diseconomies

Urban growth with agglomeration economies and diseconomies, Von Rabenau, B. (1979). Geographia Polonica, 42, 77-90. The author analyzes urban growth and examines both economies as well as diseconomies typically associated with such growth. He concentrates on two theories that offer explanations for economy/diseconomy: The export base theory, that states that the size of an urban manufacturing area is determined by the export demand by the rest of the country for goods produced in that area. The factor price differentials theory, that states that factor price differentials determine differences in urban or regional growth rates.

Agglomeration diseconomies of traffic congestion and agglomeration economies of interaction in the information‐oriented city, Higano, Y., & Shibusawa, H. (1999). Journal of Regional Science, 39(1), 21-49. Higano and Shibusawa introduce a partial equilibrium model of land, labor, and transportation markets. The model is based in an information‐oriented city with agglomeration diseconomies of traffic congestion and agglomeration economies of interaction. The equilibrium is obtained by mathematical calculations employing distinct utility, production, and congestion functions. Higano and Shibusawa collate their  laissez‐faire equilibrium with an optimum and conclude that at its optimum, the centralized business district is extremely compacted and the city assumes a largely suburban character.

Urban agglomeration and dispersion: a synthesis of Alonso and Krugman, Tabuchi, T. (1998). Urban agglomeration and dispersion: a synthesis of Alonso and Krugman. Journal of urban economics, 44(3), 333-351. Tabuchi’s article samples a two-city system framework and analyzes urban agglomeration economies caused by product variety, and agglomeration diseconomies brought forward by bottlenecks within the city. The author also analyzes the effects of a decrease in costs of mobility on  concentration and dispersion in the framework. He concludes that a lower cost of mobility triggers dispersion and that compared to agglomeration, dispersion has far more adverse effects on welfare.

Economies and diseconomies of agglomeration, Richardson, H. W. (1995). In Urban agglomeration and economic growth(pp. 123-155). Springer, Berlin, Heidelberg. The author seeks to highlight the inconsistencies in urban economics pertaining to the observation that while both agglomeration economies as well as diseconomies drive economic activities and population within cities, they themselves have inexplicable internal workings. The agglomeration of economic activities and population within cities can be attributed to external economies of scale. Similarly, the concentration of higher order consumer services in larger urban agglomerations can be attributed to population-related scale economies subject to distance decay.

Is population scale a worthless surrogate for business agglomeration economies?, Moomaw, R. L. (1983). Regional Science and Urban Economics, 13(4), 525-545.  The author assesses Carlino’s assertion that population scale, being an agglomeration diseconomy, negatively affects productivity. This study applies empirical cross-sectional productivity equations to obtain majorly contradictory outcomes – out of six sampled industries, five industries demonstrate positive effects of population scale, while only one industry shows a negative effect. The author concludes that population scale is a largely agglomeration economy and not a diseconomy.

Determinants of agglomeration economies and diseconomies:: empirical evidence from Tokyo, Zheng, X. P. (2001). The author performs an empirical study of the economies and diseconomies that have resulted from population and industrial agglomeration in the Tokyo metropolitan area. Application of econometric estimations confirm the following characteristics: The spatial concentration of business headquarters, financial institutions and governmental organizations have given rise to economies of agglomeration. High property prices, high commuting times and low environmental indicators for quality of life have brought about agglomeration diseconomies.

Measuring optimal population distribution by agglomeration economies and diseconomies: a case study of Tokyo, Zheng, X. P. (1998). This paper studies the distribution of population in the Tokyo metropolitan area with an emphasis on the influence of agglomeration economies and diseconomies on the behaviors of businesses and households. The objective is to measure optimality of population distribution in the sampled area. A cost-benefit analysis of the statistical data concludes that optimality can be achieved in the central and peripheral agglomerations, but nowhere in between.

Evidence on agglomeration economies, diseconomies, and growth, Wheeler, C. H. (2003). Journal of Applied Econometrics, 18(1), 79-104. This paper analyzes data on growth in population and employment in both metropolitan as well as county levels. The motive of the study is to prove or disprove the following urban theories: The size of a local economy correlates with human capital levels as well as availability of specialized inputs. Once urban agglomerations reach their size limitations, diseconomies begin to take the place of economies.  Data analysis shows that the above patterns are largely absent in metropolitan areas, while significantly present in counties.

Manufacturing agglomeration economies as returns to scale: a production function approach, Carlino, G. A. (1982, December). In Papers of the Regional Science Association (Vol. 50, No. 1, pp. 95-108). Springer-Verlag. Theorists such as Weber, Hoover, Isard, Richardson and Mills have stated that the concept of agglomeration economies explains why manufacturing activities have seldom been concentrated in metropolitan agglomerations. However, while theoretical models of agglomeration economies do exist, it is extremely difficult to measure agglomeration economies empirically. Although several attempts have been made to measure agglomeration economies as a residual, this paper asserts that such measurements present significant problems.

 

Agglomeration and productivity: Firm-level evidence from China’s textile industry, Lin, H. L., Li, H. Y., & Yang, C. H. (2011). China Economic Review, 22(3), 313-329. This paper samples a firm-level panel dataset of Chinese textile manufacturers for the period 2000 – 2005 and investigates whether the spatial concentration of textile manufacturing activities in China has any positive influence on firm productivity. The authors apply the Ellison–Glaeser (EG) index of spatial concentration for each year and put forward the following observations: Spatial agglomeration for garments shows a decreasing trend for the period of study. Textile industries’ agglomeration shows an increasing trend for the same period. There exists an inverted U-shaped correlation between agglomeration and productivity.

Industrial decline, regional policy and the urban—rural manufacturing shift in the United Kingdom, Keeble, D. E. (1980). Environment and Planning A, 12(8), 945-962. This paper outlines an analysis of  the change of manufacturing employment in the United Kingdom between 1971 and 1976 through procedures such as Theil entropy index, shift-share, and regression analyses. It concludes that there exists a prominent urban–rural shift in the relative distribution of manufacturing employment, mostly related to non structural determinants.

 

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