Location of housing and industry around city centre amenities

Abstract

We investigate the endogenous emergence of residential and industrial areas when proximity to the centre benefits both households and firms. Households wish to locate near firms and near the centre due to costs of commuting and of visiting the centre that are proportional to distance. Firms wish to locate near households because this reduces the wage they need to pay to attract workers, and near the centre due to the iceberg cost of transporting their output to the centre. Depending on the relative magnitude of three cost parameters (commuting to work, visiting the centre, transporting output to the centre), different urban structures arise. If the cost of visiting the centre is large and the cost of commuting to work is small (relatively to the cost of transporting output), households locate in the centre and firms in the outskirts. The opposite occurs if both costs are very small. If the cost of visiting the centre is small and that of commuting to work is large, housing and industry become completely integrated. Complex urban structures emerge in intermediate cases.