In this Appendix, we give the basic ingredients of the standard urban economic model. Modern urban economics is based on the concept of bid-rent curves, first introduced by von Thünen (1826) in the context of agricultural land use. Alonso (1964) is the first author who successfully generalizes von Thünen's concept of bid-rent curves to an urban context. For a deeper understanding of these types of models, the reader is strongly advised to read Fujita (1989). It is important to observe that, throughout this book, we follow the Alonso's approach in the sense that individuals consume land directly and thus we use the terms “land” and “housing” interchangeably. Mills (1967) and Muth (1969) proposed a more realistic model where land is an intermediate input in the production of housing, which is the final consumption good. We refer to Brueckner (1987) for a unified treatment of these two approaches.

The Basic Model with Identical Agents

We assume that the city is linear and monocentric. This means that the city is described by a line in which all jobs and all firms (which are assumed to be identical) are located in the Central Business District (CBD), which is, for simplicity, normalized to zero and all workers/consumers endogenously decide their residential location between 0 and the city fringe xf. Landlords allocate the land to the highest bids in the city. All workers/consumers are employed and are identical in all respects. There are exactly N identical workers. There are neither mobility costs within the city nor migration costs between the city and and the area outside the city. However, individuals do incur commuting costs to go to work.