Chapter 2 – Cities

2 – Hub Cities and Transport Costs

Why Should I Care?

– This Lecture Has 2 Parts

• Transport Costs

• Criticism

– What is a Hub City?

Cities are usually transportation hubs. Places where boats and trucks, meet planes and any other mode of transportation. Producers who locate near these hubs reduce transportation costs, as long as congestion is not too important.

• Transport Costs

Jacobs (1970) argues that cities, being where the consumer market is, are natural locations for producers. However, cities can become congested, which seems inefficient for producers who leave to lower density locations.

Jacobs argues the issue is more complex than this. She argues that cities also reduce the transport costs of inputs to production. Inputs are diverse, and may need to be imported from a variety of locations. Being centrally located, and endowed of transportation hubs, cities reduce the overall transportation cost of gathering these inputs.

So even if cities become congested, their central location keeps companies around, especially if they have to source their inputs from diverse locations. The key to understanding what this means is to consider the diversity and variety of inputs that go into the production of even simple products.

1. Input Location-Transport Cost Theory

• Definitions
  1. Four resources are located in isolated regions.
  2. The resources are used to produce 1 product.
  3. The four regions are equidistant from each other.
  4. Roads link the four regions together in all directions.
  5. The manufacturer must produce in 1 location only.

• Assumptions
  1. The manufacturer prefers to reduce all transportation costs.
  2. There are no tax breaks at any locations.
  3. The roads are flat, and uncongested.
  4. Labour is mobile.

• Predictions
  1. Manufacturing will locate at E (hub location).

Interpretation

Imagine a simple economy where 1 good is produced, such as an office chair. The product is made with four inputs. Each input is located in a different region. Wood is in the North. Plastic wheels are in the South. Labour is West. Leather is East.

If there are six roads (straight lines) that link these regions, the hub of those regions will naturally be chosen as the manufacturing and assembly site, as it reduces the overall transportation costs of the inputs. The manufacturer has to locate next to a road. There are thus five possible locations (A, B, C, D, and E).

Assuming the transport costs are equivalent between the inputs, the cheapest production location is E.

Input Location-Transport Cost Diagram – Equidistant locations

• Criticism

You may object that companies must also consider the transportation costs of the final good to the market.

In this case most of the chairs would be sent West, and some to the other three regions. The final location decision might be E, or somewhere between C and E.

You may also object that a company would not locate in an unpopulated area. This is reasonable.

However, if E becomes the natural location of production, labour will migrate to E, and a settlement will form. We can postulate that other manufacturing activities would also migrate to E because of agglomeration economies discussed earlier. This would create a positive feedback loop for the E location.

Input Location-Transport Cost Diagram – Non-Equidistant locations

In-Class Activity – See Innovatank Challenge

Imagine you are the CEO of a frozen pizza plant. You wish to produce using Quebec suppliers, for the Quebec and general north-east American market.

Choose a location in Montreal, considering the following supplies, and their transport costs (trucking and traffic).

Cheese – from Chambly or Terrebonne

Tomatoes – from Mirabel or Châteauguay

Labour – from Rivière-des-Prairies or LaSalle

Flour – from Hochelaga-Maisonneuve

Pepperoni – from Laval or Longueuil

Ideas for new recipes – from the “cultural” central boroughs, travelling abroad, from books, from TV, from trade schools.

Use the map, and decide where in Greater Montreal you would locate your manufacturing plant, as you try to reduce the total transportation costs of production and delivery?

Source: Google Maps

– Think Piece

The transport cost model assumes that labour is mobile. What if labour is not mobile, how does this affect the location decision?

What variables can affect labour mobility?

Submit 1 page essay in-class.

– Wrap-Up

Companies are always trying to reduce their production costs. Holding labour, land, and capital costs constant, transportation costs are an important factor in the location decision of producers.

All else equal, producers will choose to locate in the city, or region, that minimizes their transportation costs. Jacobs argues that one must consider the transportation costs of bringing inputs to the factory, and the costs of distributing outputs to market.

According to Jacobs, cities do both. First, cities are central locations relative to the diversity of natural and capital resources that are needed for production. Cities also provide a local pool of labour. Second, cities are markets in themselves for the products, so they also reduce the distribution costs.

According to a simple model, the hub – even uninhabited and not endowed of resources – will become the natural production location because it reduces the overall transportation costs.

– References and Further Reading

Jacobs, J. (1969). The Economy of Cities. Vintage.