Chapter 25: Location Externalities: Effects on Modeling, Infrastructure Provision and Optimal Planning

In this chapter we study how the interaction between agents in the urban context affects the location distribution of households and firms in the city. By “interaction” we mean the dependency of one’s location choices on other agents’ location, or in other words how the location decisions of one agent may affect the location choices of all other agents. These interactions are a form of externality inasmuch as individuals make choices that generate unpremeditated effects on other individuals.

In large cities there are a number of externalities, for example those associated to the transport system, which are well identified by the public eye and the media because of their known harmful effects, such as traffic congestion that increase travel times, or noise and pollution that damage health. In the production of sector, retail and services for example, there are also interactions that generate spatial agglomeration economies, which describe the extra benefit of producing in an area where the land use is advantageous for the economic activity. Similarly the valuation of the neighborhood quality by households and firms generates yet another form of externality, more commonly associated with the location of residences than with other commercial activities.