Productivity Effects of Urban Transport Improvements

11/5/04: Revised.

Anthony J. Venables

LSE and CEPR

Abstract: There is a substantial empirical literature quantifying the positive relationship between city size and productivity. The paper draws out the implications of this productivity relationship for evaluations of urban transport improvements. A theoretical model is developed and used to derive a wider cost-benefit measure that includes productivity effects. The order of magnitude of such effects is illustrated by calculations in a simple computable equilibrium model. It is argued that productivity effects, particularly when combined with distortionary taxation, are quantitatively important, substantially increasing the gains that are created by urban transport improvements.

JEL classification: R200, R420

Keywords: Agglomeration, productivity, urban transport.

A.J. Venables
Dept of Economics
London School of Economics
Houghton Street
London WC2A 2AE
UK

a.j.venables@lse.ac.uk

http://econ.lse.ac.uk/staff/ajv/

Project undertaken for the Department for Transport.

Revised version of 'Productivity effects of urban transport improvements', written for the UK Department for Transport, June 2003. Thanks to participants in discussions at the Department for helpful comments.

Executive Summary

There is considerable evidence of the productivity benefits of clustering economic activity together into dense spatial units. Indeed, the existence of such agglomeration economies is the main economic basis for the existence of cities. Against this benefit are the costs associated with moving around within cities, and perhaps also costs of getting goods into and out of the city. The trade-off between these sources of benefit and cost is one of the main determinants of city size. This trade-off suggests that a transport improvement may enable a city to become larger, and thereby increase the extent to which agglomeration benefits are achieved. The objective of this paper is to show how these arguments change the way in which urban transport improvements should be appraised. In addition to the effects captured in a standard cost-benefit analysis, a transport improvement increases productivity for new city workers and also for existing city workers now reaping the benefits of a larger agglomeration. These productivity effects interact with distortions created by income taxation, reinforcing the gains further. We argue that these wider benefits of transport improvements, absent from a standard analysis, may be quantitatively significant. The argument is organised as follows. We start (section 2) with a short review of the evidence on the productivity effects of urban centres. Section 3 outlines a model of urban equilibrium and section 4 derives analytically the effects of a transport improvement in a simplified version of the model of section 3. Section 5 reports numerical simulations of the effects of a transport improvement, establishing the quantitative significance of the mechanisms analysed.