The City as a Firm

Abstract

A simplified model is produced to illustrate the proposition that, where efficiently operating cities compete on a world market, land rents representing the social opportunity costs of land occupancy will in each city aggregate to the sum of the intramarginal residues that reflect the economies of scale of the activities the existence of which within the city account for its optimal size being as large as it is. Full efficiency thus requires that all such land rents be devoted to the subsidy of these decreasing-cost industries, and the appropriation of these rents by landlords for other purposes precludes the achievement of full efficiency. Where such appropriation precludes efficiency elsewhere, and world prices are thus not at the efficiency level, it will be to the general long-run advantage of landlords in a particular city, as well as to locally constrained labour, for rents to be used for such subsidy, even though initially they may be inadequate to do the full job.