The organization of space within cities is mainly driven by spatial equilibrium forces. This chapter argues that a person who is indifferent about living in two locations within the city must derive the same net utility from these locations. This allows us to explain how rent costs decline away from the city centre as people need to be adequately compensated for higher transportation costs. We can extend the basic framework to incorporate the choice of different transport methods, changes in the slope of the rent gradient, the choice of the amount of land to use (and thus population density), building height, individual heterogeneity, the role of amenities, and observed segregation within the city.

Power laws (and the special case of Zipf’s law) allow us to characterize cities on a map with a single number, namely the slope of a rank-size curve. These rank-size curves show the rank of a city as a function of its size: the biggest city gets rank 1, the second largest city rank 2, and so on. The slope tells us whether cities are relatively similar in size (small slope) or unevenly sized (steep slope). But what explains the existence of different sized cities? This chapter introduces some urban theories that explain the existence of different sized cities; a graphical representation of the Henderson model and a graphical representation of a state-of-the-art model of differentiated cities as developed by Davis and Dingle.

The possible sources and mechanisms underlying urban agglomeration economies cannot be tested directly, which implies that empirical research uses approximations for agglomeration economies, like city size, density, economic specialization, or human capital. Since these are all endogenous variables, any effect on city wages or productivity cannot be taken as direct evidence of the relevance of agglomeration economies. This chapter discusses modern studies that use micro-data in combination with instrumental variables or fixed effects to assess the relevance of agglomeration economies. Apart from the use of micro-data and clever empirical estimation strategies, we also discuss several alternative strategies for urban economics to further increase our knowledge of the location choices made by people as well as firms between cities. Among these alternative strategies are the quasi-experimental research design, the integration of the two main building blocks (spatial equilibrium and agglomeration economies) in urban economics, a shift of attention from agglomeration benefits to costs, and looking outside the field of economics.

The organization of space within cities is mainly driven by spatial equilibrium forces. This chapter argues that a person who is indifferent about living in two locations within the city must derive the same net utility from these locations. This allows us to explain how rent costs decline away from the city centre as people need to be adequately compensated for higher transportation costs. We can extend the basic framework to incorporate the choice of different transport methods, changes in the slope of the rent gradient, the choice of the amount of land to use (and thus population density), building height, individual heterogeneity, the role of amenities, and observed segregation within the city.

The possible sources and mechanisms underlying urban agglomeration economies cannot be tested directly, which implies that empirical research uses approximations for agglomeration economies, like city size, density, economic specialization, or human capital. Since these are all endogenous variables, any effect on city wages or productivity cannot be taken as direct evidence of the relevance of agglomeration economies. This chapter discusses modern studies that use micro-data in combination with instrumental variables or fixed effects to assess the relevance of agglomeration economies. Apart from the use of micro-data and clever empirical estimation strategies, we also discuss several alternative strategies for urban economics to further increase our knowledge of the location choices made by people as well as firms between cities. Among these alternative strategies are the quasi-experimental research design, the integration of the two main building blocks (spatial equilibrium and agglomeration economies) in urban economics, a shift of attention from agglomeration benefits to costs, and looking outside the field of economics.

Power laws (and the special case of Zipf’s law) allow us to characterize cities on a map with a single number, namely the slope of a rank-size curve. These rank-size curves show the rank of a city as a function of its size: the biggest city gets rank 1, the second largest city rank 2, and so on. The slope tells us whether cities are relatively similar in size (small slope) or unevenly sized (steep slope). But what explains the existence of different sized cities? This chapter introduces some urban theories that explain the existence of different sized cities; a graphical representation of the Henderson model and a graphical representation of a state-of-the-art model of differentiated cities as developed by Davis and Dingle.