Clustering of Firms
1. firms of a particular industry may locate in a certain location because they can share inputs. For example, a bio-tech firm would like to locate in RTP because there is a large pool of skilled labor produced by a number of universities in the surrounding areas. Industries that use a lot of power may want to locate in places where there is a cheap source of power.
2. Firms are able to recruit the labor that ideally matches their requirements. Workers may move to places where their skills are in demand. So, a new firm locating in a place with similar firms will be able to recruit from pool of workers from the right kind of skills.
3. Different ancillary services that are needed by the industry would also be located in the place where the firms cluster (like lab services in bio-tech clusters). This can help firms enjoy economies of scale. So, a number of small firms can provide services to a large firm.
4. There is a lot of knowledge spillovers. Firms in the same industry can learn from each other, and can work together to promote knowledge sharing of certain types.
Optimal City Size
As a result, we end up seeing some areas specializing in certain industries. However, we also see cities that have a number of industries located within its borders, like New York.
As firms cluster, people move to those areas, increasing density, which creates urbanized areas. There are benefits and costs of a growing city. If benefits of living in a city (higher wages, better amenities, more employment opportunities) outweighs costs (congestion, pollution, high prices), people will continue to come to cities. However, as more people moves to cities, congestion costs become very high. Planners need to find out new ways to accommodate more people in limited space, some of which are illustrated in this TED video.
However, even as people move to the city, they may choose one location over the other. Tiebout (1956) in his paper, showed that a consumer-voter would pick the community where they want to live based on their preferences. If they a particular neighborhood provides a public good that a consumer wants, then she will move to that neighborhood. The job of the local government is to provide those public goods, and they finance it through taxation. Thus, taxes are a mechanism to allocate public goods in an area. One feature of public good is that one cannot be excluded from using it, but by taxation, the local government can ensure that only those who pay the tax can receive the public good (like school districts). By adjusting tax rates and public goods provision, local governments can attract people to certain neighborhoods.
Exclusion
However, as neighborhoods form, certain groups and individuals can be excluded from that neighborhood overtly or inadvertently. Ali Madanipour wrote an essay about exclusion and said exclusion can be driven by economic (lack of jobs), political (lack of representation in government), or cultural (for example, differences in language or dialect). A poor individual may feel socially excluded from certain neighborhoods because he may not 'fit in.' The more restricted the social exclusions are, the more restricted are the places where a person is comfortable hanging out. The creation and sorting of neighborhoods according to Tiebout (1956) can lead to segregation of land and property markets. Some areas become exclusive neighborhoods, and other areas become poor neighborhoods, and those living in the disadvantaged neighborhoods can feel socially excluded from the well-off neighborhoods. In the long run, this can lead to a breakdown of cultural and political ties, leading to a 'culture of poverty,' as explained by Oscar Lewis.
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