Substitution by Consumers in the Urban Economy

Abstract

The Mills model emphasizes the importance of substitution in production by builders and exporters in the spatial organization of the urban economy. Firms are seen to alter their use of land, labor, and capital across the city in response to systematic variations in the price for land (market rent). Mills’ approach is similar to that of Muth (1969). The Mills and Muth models assume no substitution among goods by consumers. Regardless of how costly accommodation may become as we approach Point O, the consumer always consumes 1.0 unit of accommodation. In this chapter, I now introduce substitution by consumers. I begin with a classic formulation of the Alonso model in which the consumer substitutes between size of land parcel occupied and a composite “other good”. The consumer has a budget that gets expended on commuting cost, land rent, and the other good. In a competitive land market, the rent per unit land at every location adjusts until consumers are indifferent among sites at which they are the highest bidder. Where the price (market rent) for land is relatively high, the consumer consumes less land and possibly more of the other good. This outcome is different from the models in Chaps. 5– 10 where the worker is assumed to always consume the same amount of land (and the same amount of the composite other good) regardless of location. This model is then extended to cover the case where the consumer expends both money and time in commuting. Finally, a variant of the model is presented in which the consumer values not the size of the parcel itself, but rather the distance from neighbors.