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SERC/Urban and Spatial Programme Discussion Paper
Agglomeration Externalities and Urban Growth Controls
Wouter Vermeulen
October 2011
Paper No' SERCDP0093:
Full Paper (pdf)

JEL Classification: R52; R12; R13

Tags: agglomeration externalities; growth controls; second-best policy; systems of cities

Should constraints on urban expansion be relaxed because of external agglomeration economies? In a system of heterogeneous cities, we demonstrate that second-best land use policy consists of a tax on city creation and a subsidy (tax) on urban development in cities in which the marginal-average productivity gap is above (below) average. However, the implementation of this policy requires coordination at the system level. A tax on city creation does not raise welfare if development taxes are set decentrally by competitive urban developers, nor does correction of these taxes raise welfare if a tax on city creation is unavailable. In the resulting constrained optimal allocation, urban development is subsidized in all cities. The quantitative significance of these findings is explored in an application of our model.

This paper has been published as:
'Agglomeration externalities and urban growth controls', Wouter Vermeulen, Journal of Economic Geography, Volume 17, Issue 1, January 2017