Cities in Competition PDF

Urban Studies, Vol.
36, Nos 56, 865891, 1999

Cities in Competition: Equity Issues
Chris Jensen-Butler
[Paper received in nal form, December 1998]
1. Introduction
There is a growing consensus that in the
emerging globalised and knowledge-based
economy, competition is increasing between
localities across national borders. For a var-
iety of reasons, the city is becoming the
principal type of locality from which this
spatial competition is driven (Cheshire and
Carbonaro, 1996; Jensen-Butler et al., 1996).
The main reason for the new role of cities is
perhaps the growing importance of creativity
and innovat ive capacity in determining econ-
omic performance. Creativity and innovative
capacity are typically both highly localised
and immobile, and cities are the prime local-
ities where these develop. At the same time,
there is a growing theoretical interest in re-
gional and urban economics as well as in
economic geography in the analysis of the
spatial dimensions of imperfect competition
and increasing returns, pointing to the growth
advantages of concentration of economic ac-
tivity (Krugman, 1991, 1995). These devel-
opments have been paralleled by a shift in
the policy orientation of many cities towards
a more entrepreneurial rather than a redis-
tributi ve or managerial role (Harvey, 1989;
Lever, 1992; Parkinson, 1991).
As a consequence of these developments,
the question of the nature of the determinants
of city success in the new competitive en-
vironment is frequently posed. Examination
of policy statements from a wide range of
European and North American cities sug-
gests three key dimensions: efciency; a
minimum level of social equality; and a clean
and attractive environment (see, for example,
Lord Mayors Ofce, 1991; Regional Plan
Association, 1990). There are also theoretical
arguments for the identication of these three
dimensions as being central to urban success
(Jensen-Butler, 1996a). This raises an old
question in a new context: what is the rela-
tionship between efciency and equity in the
context of the city and which consequences
does this relationship have for urban econ-
omic success? This is the issue addressed in
the present paper where the prime interest is
the relationships between urban economic
performance and equity within the city. Is-
sues of territorial justice between different
cities in a city system are not considered.
First, denitions of equity and efciency are
examined together with different views of
the relationship between efciency and eq-
uity in a general theoretical framework. In
section 3, analysis of this relationship is un-
dertaken in the urban context, where rst the
housing and labour markets in cities are con-
sidered, followed by examination of the rela-
tionship in the context of the new
knowledge-based information economy. In
sections 46, the relationship between urban
policy and equity issues is examined. In sec-
tion 4, the equity consequences of policies
Chris Jensen-Butler is in the Department of Economics, University of St Andrews, St Andrews, Fife, KY16 9HL, UK. Fax: (1334)
462444. E-mail: cnj@st-andrews.ac.uk. The author wishes to thank Carlos Esteves of the Department of Environment and Planning,
University of Aveiro, Portugal, for technical assistance.
0042-0980/99/05/0865-27 1999 The Editors of Urban Studies
CHRIS JENSEN-BUTLER 866
designed to address market breakdown are
discussed; in section 5, the efciency and
equity issues involved with urban service
provision are examined; and in section 6, the
consequences of the new type of entre-
preneurial urban policy for equity are dis-
cussed. Section 7 presents an empirical
illustration of the conceptual complexity and
difculties of measurement of equality in an
urban context .
2. Equity and Efciency: Denitions and
Basic Theory
Efciency can be dened as the maximisa-
tion of growth in an economy, which in turn
implies the optimal allocation of resources
over time. Equity relates to the distribution
of consumption or income (or utility)
amongst members of society. In its broadest
interpretation it relates to well-being, as an
expression of satisfaction. The interrelation-
ships between efciency and equity are im-
portant both for the performance of the urban
economy and for urban policy.
Efciency, following general equilibrium
theory, involves the optimal allocation of
inputs to production and outputs to con-
sumers as well as an optimal product mix for
the economy as a whole. Pareto optimality
means that no reallocation of inputs can be
made to produce more of one product with-
out producing less of another. No realloca-
tion of outputs between consumers can be
made without making at least one consumer
worse off and no other output combination
can be selected without reducing aggregate
utility. Edgeworth boxes are traditionally
used to illustrate the derivation of contract
curves representing efcient solutions. Fig-
ure 1 shows a utility possibi lities frontier
between two individuals, which represents
the contract curve in terms of their utilities.
Any point on the curve is efcient, but points
A and C are highly inequitable whilst point B
is equitable.
The market will, under certain conditions,
ensure Pareto optimality. These conditions
are absence of monopoly or oligopoly; ab-
sence of externalities, positive or negative;
and absence of public goods (goods which
are non-rival and non-excludabl e). As will be
Figure 1. A utility possibili ties frontier between two individu als: the curve uu correspo nds to the contract
curve.
EQUITY ISSUES 867
argued later, especially in urban areas these
conditions are not met.
In addition, the ability of the market to
attain Pareto optimality assumes, under per-
fect competition, that a number of conditions
regarding the nature of the transactions can
be met. These include: the possibil ity of
marginal adjustments in production and con-
sumption; perfect knowledge and infor-
mation about the values of all outcomes
(implicitl y implying a short- to medium-term
time-horizon for production and consump-
tion); homogeneit y of each product; lack of
market rigiditi es. In the urban case, many of
these conditions do not exist as land is in
xed supply, many urban investments are
large and indivisi ble, time-horizons associ-
ated with urban investments are frequently
long and projects are often associated with
considerable risk.
The failure to meet these conditi ons con-
stitutes market breakdown and it is a princi-
pal reason for the existence of strong public
policy regimes in cities, where market break-
down is common (Jensen-Butl er, 1996a).
A second important reason for public in-
tervention is to reduce social and economic
inequalitythe equity goal, based on the
political aim of changing the distribution of
income (utility) in society. Market solutions
and Pareto optimality take no account of the
distribution of utility amongst individuals in
a society. All points on the utility possibility
frontier in Figure 1 are equally acceptable in
efciency terms, but they may not be so in
terms of equity. Urban policy has tradition-
ally had a rm base in equity goals.
The concept of equity is, as Richardson
(1977, p. 161) and many other economists
have noted, very unclear, not least because it
moves economics into the uncharted realms
of philosophy and ethics. More specically,
the concept of equity is slippery for three
main reasons. First, there are different ap-
proaches to its denition. Secondly, there is
considerable divergence of views concerning
the relationship between equity and
efciency. Thirdly, further problems are in-
troduced when the concept of spatial, as op-
posed to interpersonal, equity is introduced.
All three problems, it appears, impinge
signicantly upon the urban case.
2.1 Dening Equity
Equity is a difcult concept to operationalise
as well-being is clearly a multidimensional
phenomenon, including many elements
which are difcult to quantify. There has
long been awareness that, ideally, an inte-
grated approach, incorporating many dimen-
sions of social well-being into a composite
measure is to be preferred (Coates et al.,
1977). There are, however, serious theoreti-
cal and operational problems facing the con-
struction of such a multidimensional index.
Proposals for an approach to the study of
social well-being and equity often rely on a
selection of indicators (Knox, 1975), but here
again, theoretical, aggregation and weighting
problems are substantial.
Operationally, a common index of equity
is a measure of dispersion of income per
capita in an economy, a measure that can
refer either to individuals or spatial units.
The Gini coefcient, derived from the
Lorenz curve, is commonly used. Changes in
this type of index represent a rather strong
view of equity. Four broad denitions of
equity can be identied in relation to the
social welfare function:
W
5
W(U1, U2, Un)
which represents a way of aggregating the
utility levels (U) of the n members of society.
The egalitari an view of equity requires
that all members of society receive
equal amounts of goods or income. In
terms of changes, this requires that any
economic transaction involves the conditions
dW/dUi .0 and dsu/dUi ,0; where s is a
measure of dispersion of U. This view of
equity is commonly used in spatial and urban
studies of social justice.
The Rawlsian view of equity (Rawls,
1971) argues that everyone should enjoy the
same basic libertarian rights, and that while
the distribution of wealth and income need
not be equal, it must be to everyones advan-
tage (p. 61). For Rawls, social justice is not
increased by any transaction unless the utility
of the person with the lowest level of utility
is increased: dW/dUi .0 and dW/dUmin .0.
Equality is not in outcomes, but in rights and
opport unities. Rawls approach opens the
possibi lity that as long as a declining share of
a growing cake represents an increase in
utility for the person with the smallest share,
then social justice is improved. It is possibl e
to interpret in the Rawlsian framework the
current view that social justice in a city can
be improved by the engagement of city au-
thoriti es in local urban economic develop-
ment. Here the income of the poorest can be
improved through employment or increased
productivity whilst in relation to strict egali-
tarian principles, equity may decline. Mier
(1993) provides an example of the appli-
cation of Rawlsian ideas to economic devel-
opment in Chicago.
The utilitarian approach to equity, orig-
inating with Bentham and developed by Mill,
weights every persons utility equally and
seeks to maximise the total utility of society.
Thus:
W
5
U
1 1U
2 1 . 1U
n
Here, a signicant principle is that there is no
positive weighting of the utility of the
poorest. Also, this view of utility and welfare
opens for the possibil ity that winners can
compensate losers as long as W increases.
The utilitarian view has an interesting conse-
quence for equity when coupled with the idea
of diminishing marginal utility, in this case
of money. Income transfers from rich to poor
will increase utility of the poor by more than
the utility of the rich is decreased, a result
noted by Pigou (1920) . Therefore societys
total utility will increase. However, utilitari-
anism rests heavily on the problematic con-
cept of cardinal utility.
Finally, the concept of equity in the pure
market approach equates equity with a situ-
ation where each unit of labour (and capital)
is remunerated according to the value of its
marginal product. In the case of labour:
dQ
dL
p
5
w
where
dQ
dL
is the marginal product of labour; p the
unit price of output; and w the wage rate.
The welfare function here is the sum of
consumer and producer surplus plus external-
ities. This type of social welfare function is
generally not associated with equity. At best,
market solutions are equity neutral. A more
commonly held view is that pure market
solutions will create inequality. The recent
work of Krugman and Venables (1995) sug-
gests that in the face of declining transport
costs and increasing returns to scale, polaris-
ation of economic activity and income will
be the principal spatial consequence of econ-
omic growth, contrary to the predictions of
neo-classical regional growth theory. Boyne
and Powell (1993) identify an increase in
territorial injustice, measured by the strength
of the negative relationship between social
needs and housing provision in space, in
Britain in the 1980s. This, it is argued, arose
from increasing market orientation in the
period.
2.2 Separability of Efciency and Equity
The standard approach to the social welfare
function assumes that efciency and equity
are separable; they do not interact (Solow,
1970). This arises from the Second Welfare
Theorem, which basically states that given
any initial resource endowment, there is a
point on the contract curve that corresponds
to a Pareto optimum. It follows that redistri-
bution for equity goals can occur without
affecting efciency, not through manipu-
lation of prices, but only through reallocation
of endowments, in the form of scal mea-
sures and income transfers. There are, how-
ever, three basic views on the separability
issue.
The rst is that there is no interaction. This
means that equity goals can be pursued cost-
lessly as long as this occurs through realloca-
tion of income and not through manipulation
of relative prices.
The second arises from growing criticism
EQUITY ISSUES 869
Figure 2. The tradition al view of the trade-of f between efciency (national growth, Yn) and equity ()
represented by the curve tt: PP is the decision -makers preferen ce function and Y
n
*
and * the outcome.
of the notion of separability. For example,
Atkinson and Stiglitz (1980) argue that redis-
tributi on of endowments affects incentives
and productive outcomes. Also, it is clear
from the two welfare theorems that any inter-
ference with prices will affect efciency
negatively. This leads, as shown in Figure 2,
to the idea of a trade-off between efciency
(Yn), representing growth in the national
economy and equity (). The trade-off curve
is tt and the decision-makers preference
function is represented by PP. Equity can
here be treated as either spatial or non-
spatial. The principal consequence of this
position is that any argument for striving
to increase social equality must be non-
economicfor example, political, moral or
ethical.
The third position is that there is a positive
relationship between increasing equality and
efciency, even though income redistribution
and manipulation of market prices are the
means by which greater social equality is
achieved. Risk-aversion amongst actors af-
fects expected utility values, which can be
one reason for this positive relationship. Re-
cent research has suggested that equity and
economic and political stability are closely
related and that stability induces faster
growth (Persson and Tabelini, 1994; Alesina
and Perroti, 1993).
There is a substantial literature on the
effects of both inequal ity and the welfare
state on economic growth (see, for example,
Okun, 1975). In the view of a number of
authors, including Atkinson (1995a, 1995b) ,
the main conclusion emerging from compar-
ative cross-country empirical studies is that
the hypothesis that greater equality means
less efciency is not proven. Atkinson
(1995b) examines theoretically the supposed
underlying mechanisms by which welfare
state expenditure reduces efciency. He
takes a CobbDouglas production function:
Y
5
K
1 2b
(AL)
b
(1)
where, Y is output; K is capital; L is labour;
and A is productivity.
Taking logs, differentiating, and assuming
a constant labour force, gives the growth rate
form (where g
i
is the propor tional growth
rate of variable i):
gY 5
(1 2b)gK 1bgA (2)
The standard argument is that welfare state
provision reduces work effort and therefore
reduces A in equation (1). However, this
would be a one-off effect. The more serious
concerns relate to equation (2), where it is
sometimes argued that welfare state transfers
affect g
K
and g
A
through savings and capital
formation, investment and rm growth, and
through human capital formation. These
negative effects would not be one-off. Atkin-
son rejects these arguments on theoretical
grounds, noting that if transfer payments are
used for education, growth rates can actually
rise.
One possible resolution of these compet-
ing positions can be found in Figure 3 which
presents an extended view of the trade-off,
suggesting that the negative relationship il-
lustrated in Figure 2 constitut es only the
central part of a much larger curve (Castro
and Jensen-Butler, 1997). At very high levels
of equity, the curve approaches zero growth
asymptotically, as here the incentive to work
is based upon altruism alone. At very low
levels of equity, a positive relationship be-
tween efciency and equity appears and, as
argued later, this section of the curve is
perhaps especially relevant for some cities.
Incidentally, the societal preference curves (c
and c) show that there is no equilibrium
below point O on the equity dimension. This
opens for the possibil ity of highly unstabl e
conditions in such locations, as perhaps rep-
resented by the free fall of some inner cities.
Also, output is maximised by a societal pref-
erence which is completely indifferent to
social justice (c). The overall implication of
the shape of this left-hand section of the
curve is that severe social inequal ity has
negative effects on output and the productive
system. Therefore, improvements in equity
and improvements in efciency are posi-
tively related, up to a certain point. This
argument can be extended by two different
visions of the overall relationship as shown
in Figure 4. These are termed the Thatcher
(T) and the Scandinavian (S) visions of the
equity/efciency relationship and they could
explain differences in economic performance
in the two regions. They also suggest that the
positive relationship holds up to a minimum
threshold value of equity, wherafter the nega-
tive relationship sets in. This could poten-
tially explain differences in economic
performance among European cities, where
there are markedly different levels of equity.
Figure 3. An expanded view of the trade-of f between efciency (national growth Yn) and equity ().
Source: Castro and Jensen-Butler, 1997.
EQUITY ISSUES 871
Figure 4. Different perspect ives on the relations hip between efciency and equity: T is the Thatcher vision
and S is the Scandinav ian vision. Source: Castro and Jensen-Butler, 1997.
In the next section, it is argued that, in the
spatial context of the city, new arguments
appear which reinforce the view that here
there is a positive relationship between eq-
uity and efciency.
2.3 Spatial or Interpersonal Equity
Richardson (1977) outlines a number of the
problems when treating equity as a spatial
issue. Average per capita income for a statis-
tical area says nothing about the propor tion
of lower-income groups living in the area.
The mix of public and private goods varies
considerably between areas, affecting the
value of the income criterion. Many variables
affecting welfare are not reected in money
incomes, such as educational levels and
health indices. Also, size of areal unit can
affect average income systematically. Over
time, migration can result in changes in aver-
age incomes, without any real corresponding
change in incomes for the social groups in
the area. Depending on how a city is dened
areally, declining GDP by residence can be
the result of out-migration of wealthier
households from more central areas to the
suburbs. In a policy context, area-based sub-
sidies will not necessarily go to the poorest
inhabitants in an area as typically the recipi-
ents will be the more dynamic and en-
trepreneurial, with higher incomes. Thus the
conceptual and empirical divergence between
people prosperity and place prosperity is
considerable.
3. The EfciencyEquity Relationship in
the City
High densities of economic activity and
settlement can affect interactions between
efciency and equity signicantly and sys-
tematically. These interactions are mediated
primarily though the labour and housing
markets (Badcock, 1984), and also through
accessibility to both employment and ser-
vices. These effects appear to be reinforced
when the more recent transformations of the
urban economy are considered.
3.1 Urban Labour and Housing Markets and
City Marketing
The left-hand ends of the curves in Figure 4
are especially interesting. At the level of the
individual, it is well established that poverty,
ill health, infant mortality and early death
vary strongly together (Leon et al., 1992;
Phillimore et al., 1994; Wilkinson, 1994). It
is also well known that unemployment and
qualication level vary together (Gregg,
1993) and that poverty relates directly to
choice of education and thereby quali-
cation. Thus, poverty will tend to increase
the numbers of people with low levels of
qualications in the labour force. There is
substantial evidence that indicates strong re-
lationships between income, poverty, unem-
ployment, social deprivation, sub-standard
housing and criminality (Hirscheld and
Bowers, 1997). These poverty-related factors
have clear negative effects on both the sup-
ply and productivity of labour. Furthermore,
they are essentially urban phenomena, where
concentration and spillovers reinforce the
negative effects of povert y.
Poverty in an area will tend to depress
wage levels, which can have the effect of
stimulating labour-intensive production. This
is the case of the inner-city sweatshops in the
clothing industry. At the same time, the
phenomenon of the working poor appears in
these areas, contributing to the image prob-
lem. Innovation and technologi cal change
will be retarded, making the inner cities less
attractive for innovat ive rms. Labour train-
ing and skill improvement will also tend to
suffer as employment opportunities are per-
ceived as dead-end, unstable and uncertain.
Low wage levels can also have a spillover
effect on non-marginalised sections of the
labour market, where labour may be paid at
a wage which is less than the value of its
marginal product. This in turn can create
dissatisfaction and worker resistance, reduc-
ing innovation and even productivity.
At the aggregate level, interactions be-
tween a low level of equity and economic
efciency are also apparent in the cities. A
polarised income distribution creates a poor
image for a city, making it difcult to attract
growth industries that rely heavily upon key
personnel with higher incomes and a middle-
class lifestyle. City marketing, where city
image is crucial, is of increasing importance
as a factor affecting urban economies
(Jensen-Butler, 1996b; Krantz and Schatzl,
1996). This image has a physical as well as a
social component, for example in the form of
decay, slums and abandonment. Dundee and
Liverpool are two cities struggl ing with this
problem.
Bailey (1959) developed a model of the
urban housing market incorporating demand
interdependencies, showing how income dif-
ferentials in the urban population, through
the effects of consumption externalities,
can result in excessively large areas of
low-income, poor-quality housing. If a high-
income area is adjacent to a low-income area
in a city, then demand interdependencies
occur at the boundary between the two areas.
Properties on the low-income side close to
the boundary have a premium because of
their proximity to the high-income area,
whilst those on the boundary on the high-
income side have a price discount. This
means that whilst property prices in the
interior of each area are comparable (being
ensured by multiple occupancy in the low-in-
come area), then at the boundary
(P
H 2d) ,(P
L 1p) where P
H
and P
L
are
property prices for high- and low-income
housing and d and p are the discount and
premium, respectively. It is easy to see that if
conversion costs to low-income housing,
c, are less than (P
L 1p) 2(P
H 2d) then con-
version will occur. The process will gradu-
ally draw to a standstill as the price of
low-income housing falls and high-income
housing rises. Because of multiple owner-
ship, the process will go too far in relation to
the social optimum where the interior values
are equal. If there is in-migration of low-
income families to the city and out-migration
of high-income families (which is not un-
likely), this will affect house prices in such a
way that the process can continue for even
longer. What is signicant, of course, is that
income disparity fuels the process of urban
decline.
The image problem is often compounded
by the real social costs of high levels of
criminality and drug abuse, leading to
social unrest. The urban riots in the UK in
the early 1980s were a direct response to
growing poverty and inequality (Keith, 1989)
and the Conservative governments response
had a clear aim of creating a more equitable
distribution of income in inner cities. Poverty
also increases the demand for public service
provision, creating a scissors effect of rising
EQUITY ISSUES 873
needs against a background of a limited abil-
ity to raise local nance (Mouritzen, 1992).
Green (1996) examined indicators of pov-
erty and wealth for 459 UK local authori ty
districts (LADs) in, 1981 and, 1991. On 2 out
of the 3 povert y indicators used (no-car
households and unemployment), LADs in
Glasgow, Liverpool, Manchester, Newcastle
upon Tyne and 8 Inner London Boroughs
appear in the lowest 15, as do Middles-
brough, Hartlepool, Sunderland and South
Tyneside. Between 1981 and 1991 povert y
became increasingly concentrated in the big
cities. Some of the wealthiest LADs were
also to be found in the big cities, notably
London and Glasgow. She concludes that
polarisation of the social structure and in-
creasing segregation between rich and poor
LADs in the big cities grew in the period. A
comparison with Levers (1993) work mod-
elling competition in the European urban
system using Cheshires (1990) urban prob-
lem scores, reveals striking similarities. At
the bottom of the European league table were
Newcastle, Sunderland, Glasgow, Liverpool
and Teesside. Furthermore, most of them
declined in terms of relative position during
the 1980s.
3.2 Cities, Knowledge-based Production, the
Information Society and the New Global
Economy
Space does not allow a detailed treatment of
the role of the city in the information society
and the globalised economy. However, in
condensed form, the basic ideas are that cit-
ies are now dominated by service rather than
industrial production and their economic fu-
tures are determined by their creative and
innovative capacity or knowledge-based pro-
duction (Cheshire and Carbonaro, 1996).
Innovative capacity has become the new
source of comparative advantage in the glo-
bal economy. Ideas translate into production,
or, in the formulation of Romer (1990) , the
production function involves the stock of
ideas, S, the stock of capital, K, and labour,
Ly:
Y
5
K
a
(SL
y
)
1 2a
(3)
The production function for ideas can be
dened as:
S
5
d
Ls (4)
where, S
is the instantaneous rate at which

new ideas are produced; LS is the number of
idea producers, (researcher workers); and d
is
the rate at which they create new ideas. d
can
be a constant or, more realistically, a func-
tion of S. If existing ideas increase research
productivity then S
is an increasing function
of S.
In general terms, the rate at which new
ideas are created is given by:
d
5
dS
(5)
where d and are constants. Thus, the pro-
duction function for ideas is:
S
5
dLsS
(6)
It can be seen that the production of new
ideas depends upon the number of re-
searchers and the stock of ideas S
which is
external to the individual. If .0 there is a
knowledge spillover, implying increasing
returns. In other words, knowledge spills
over between researchers. Romer considers
the economy as a whole in aspatial terms, but
these positive externality effects do not oper-
ate uniformly throughout spacethey are
highly localised and they are very urban.
Both LS and S
are overrepresented in
urban areas, partly because of higher popu-
lation densities and partly because of institu-
tional overrepresentation, both institutions
employing researchers and those stocking
knowledge. Furthermore, the interaction be-
tween researchers (LS) and productive labour
(L
y
) also constitutes a spillover effect. Areas
with concentrations of well-qualied, recep-
tive and exible entrepreneurs and em-
ployees will gain advantage. The knowledge
spillover effect depends on intensity of
interchange of ideas, which despite the Inter-
net, retains a fundamental spatial (locality)
dimension (Castro et al., 1998). Creativity
can be dened as the combination of existing
information in new ways, so that the most
creative areas, typically cities, will be those
where the number of potential combinations
is greatest. This is enhanced by local com-
petence and good communications, both in-
ternal and external, as well as a varied and
hetrogeneous cultural, scientic and informa-
tional environment. The intensity of local
presence of the two types of labour, a large
stock of knowledge and the potenti al for
interaction is enhanced by the existence
of high-quality human capital, local
entrepreneurial vitality, synergi es between
actors and the existence of local networks
generating positive externalities. These fea-
tures are clearly affected by the amenity
value of the city, where positive assets in-
clude low levels of environmental and urban
degradation, well-developed cultural facili-
ties, the intangible but important good
quality of life, together with a low-risk
environment and an environment where in-
terpersonal accessibility is high and social
and other forms of interaction frequent. In
addition, high quality housing with good
accessibility to the central areas of the city
is important. Cheshire (1995) explains the
recentralisation of urban populat ions in
northern Europe in the 1980s as a process
of cumulative causation. Those cities with
advantages in attracting skilled residents
will enter into a cumulative growth regime.
He writes:
while local policy could do nothing to
stem the loss of industrial jobs, it is more
plausible to construct urban policy that can
intervene in ways which make cities more
attractive places in which to live, es-
pecially for highly skilled workers and can
create conditions which will attract service
employment (p. 1058).
In other words, in the new urban economy,
cities can create and develop localised posi-
tive externalities rather than treating them as
cases of market breakdown.
It is here where there the link to equity
questions arises. The negative effects of seri-
ous social inequality are also highly localised
and distinctly urban. For the reasons outlined
above, cities with high levels of social in-
equality will, in general, be less able to at-
tract the labour that generates ideas and the
labour that translates these ideas into innova-
tions. They will not be strong learning envi-
ronments where the quality of human capital
is rising fast. They will usually be urban
environments where knowledge spillovers
are more limited, as interactions between
individuals in a society that is highly polar-
ised are more limited than between individu-
als in a more egalitarian society. Therefore,
will be smaller. If .1 there are increas-
ing returnsi.e. the productivity of research
increases with the stock of existing ideas. Put
simply:
5
f () for ,c (7)
where, is the level of equity in the city and
c
is a lower critical limit. As equity declines
below c, then declines.
When falls below 1, diminishing returns
set in and cumulative growth will not occur.
Similar arguments apply to a service econ-
omy. Here, more face-to-face contacts be-
tween supplier and consumer are necessary
than in an industrial economy. Substantial
social inequal ity will reduce levels of contact
and increase transaction costs.
Other factors can reinforce these effects.
Equity may enter into the utility function of
the well-qualied, middle-class person who
chooses to live in an attractive urban en-
vironment. He or she gains satisfaction from
the knowledge that the poorest members of
society are provided with a minimum level of
protection. Alternatively, risk-averse individ-
uals are prepared to pay an insurance pre-
mium to ensure that they receive a minimum
income with certainty rather than a higher
income with a degree of uncertainty. As long
as this premium is less than the difference
between the two income levels, then the indi-
vidual will prefer to pay the premium
which can, for example, include social
security payments or taxation for this
purpose.
In the following three sections, urban
policy is examined in relation to efciency
and equity issues.
EQUITY ISSUES 875
4. Urban Policy (1): Market Breakdown
One of the important reasons for urban pol-
icy is market breakdown, where public inter-
vention is required to attain optimum levels
of production or consumption of a good.
The three principal causes of market break-
down discussed below are inherently urban
and they also have important equity dimen-
sions.
4.1 Externalities
Externalities are untraded interdependencies,
costs or benets that are not incorporated
into market price, which creates a divergence
between the social optimum level of con-
sumption or production and the market-deter-
mined level. Figure 5 illustrates the case of a
negative consumption externality, where
there is a divergence between marginal pri-
vate costs and marginal social costs, created
by the externality. The public sector can
impose a Pigovian tax ab to reduce con-
sumption from q
1
to q
2
, equating marginal
social benet (msb) and marginal social cost
(msc). Standards, including development
control s and land-use restrictions, can also be
used to reduce output in the case of a nega-
tive production externality. Figure 6 shows
the case of a positive consumption external-
ity, where there is a divergence between
private (mpb) and social marginal benets. In
this case, the public sector should subsidise
by ab in order to raise consumption from q1
to the optimum level q
2
.
Externalities are inherently spatial for four
reasons. First, they are usually highly lo-
calised, as with a polluting factory, an air-
port, a noisy motorway or a congested road
intersection. Secondly, they are usually sub-
ject to distance decay: their effects diminish
with increasing distance from the source of
the externality. Thirdly, the aggregate costs
or benets of the externality depend on the
density of populat ion in the area surrounding
its location. Finally, particularly in the case
of positive externalities (and public goods)
their effect can sometimes be conditioned or
limited by the geographical extent of a juris-
diction.
Their basic spatial nature indicates why
Figure 5. A negative external ity (msb
5
marginal social benet; msc
5
marginal social cost;
mpc
5
marginal private cost).
Figure 6. A positive external ity.
externalities are also inherently urban. Cities
are centres of both production and consump-
tion and high population densities give rise to
high levels of interaction and associated high
levels of external cost or benet. Distance
decay means that marked differences in ex-
ternal costs and benets can occur over rela-
tively short distances, making social justice
issues very visible and very political. Also,
jurisdictions tend to be packed more closely
in urban areas.
Externalities and equity interact in a num-
ber of ways. A negative externality is a social
cost paid by others than those directly in-
volved in the transaction. In general, low-
income rather than high-income households
will be located around the source of a nega-
tive externality. This is because the external-
ity will have a negative effect on property
and land prices, well known from studies of
airport noise where hedonic prices relating to
the environment are derived from property
prices (Pennington et al., 1990). Filtering
mechanisms in the housing market will tend
to locate low-income families close to the
externality, where they will pay the external
costs, not infrequently in terms of deterio-
ration in health and higher mortality. The
implication is that urban policy designed to
internalise the cost of the externality, or re-
duce consumption or production through
standards enforcement, will disproportion-
ately benet low-income groups and low-
income areas. This is a case of public
intervention in the market improving both
efciency and equity.
The spatial effects of a positive externality
in terms of equity are more diffuse. Urban
renewal can, for example, benet all social
groups, but may affect property prices posi-
tively so that ltering upwards occurs and
higher-income groups enjoy the external
benets disproportionately. This is certainly
one element in the gentrication of former
low-income areas in the centres of cities.
However, some types of subsidy could have
the consequence that the benets are spread
more widely, both in social and spatial terms.
4.2 Public Goods
Public goods are dened by their consump-
tion characteristics: no one can be excluded
from consuming them and they are non-
EQUITY ISSUES 877
Figure 7. Price and quantity supplied for a public good.
rivalrousone persons consumption does
not detract from anothers. Provision of
many public goods will only occur in urban
areas, as here there is sufcient demand for
their provisi on. Parks, environmental im-
provement, refuse disposal, street lighting,
trafc control as well as police protection
and collective heating systems are examples
of public or quasi-public goods.
Left to the market, provision of public
goods will usually be less than optimal, as
there is no incentive for consumers to declare
their willingness to pay because they can
potentially free-ride. Furthermore, after the
rst consumer is supplied (with a xed quan-
tity) the marginal costs of supplyi ng the next
consumer are zero, implying that free pro-
vision is the optimal pricing strategy. Figure
7 shows how the quantity supplied of a pub-
lic good should be determined. Three indi-
viduals demand curves are represented by
D1D3, reecting willingness to pay, in turn
partly reecting different income levels.
Without public intervention, consumer 3 will
consume q1 and the other two consumers will
free-ride. The rst observation is that free-
riding is more likely to occur in cities with
strong social inequality. By implication,
measures to prevent free-riding (as with US
zoning laws or Swiss regulations on resi-
dence) will be more developed in such cities.
The level of provision will, however, be
sub-opt imal as, by summing the three de-
mand curves vertically, a collective willing-
ness-to-pay curve is obtained indicating an
optimal level of consumption at q2. The ef-
fects on equity depend on how the public
good is nanced. Strictly speaking, if user
payments are involved, then as everyone usu-
ally pays a marginal cost which is equal to
average cost, the effect is regressive as the
price does not reect marginal private
benet. If payment approximates willingness
to pay through a local or national tax system,
then the effect is neutral. If the tax system
utilised to nance the public good is pro-
gressive, the effects on equity are positive.
Clearly, public good provision can be used as
part of an urban policy strategy for increas-
ing equity. For low-income households, free-
riding is, however, a real alternative.
4.3 Monopoly
Finally, some types of public service pro-
vision have the character of a natural mon-
opoly, where average costs decline over the
entire range of production and therefore mar-
ginal cost is always less than average
cost. This means that a single supplier is, for
technical reasons, the most efcient market
structure. Marginal cost pricing in this case
will result in the monopoly making a loss as
average costs are higher than average rev-
enues and the decit will have to be covered
by subsidy from taxation revenue. Here the
possibi lity for redistribution again appears,
as in the case of public goods. More recently,
governments have tended to utilise average
cost pricing principles eliminating the need
for subsidy and thereby reducing the redis-
tributi ve effects. What does seem clear is that
privati sation of natural monopoli es will not
tend to promote increased equity.
Critique of these arguments for public in-
tervention based on market failure has come
from the public choice school (for example,
Downs, 1957). In the planning context, Web-
ster (1998) has presented a summary of the
principal points of criticism. He concludes,
however, that in the city traditional Pigovian
principles in welfare economics do seem to
hold their own against critique from public
choice theory and Coases negotiated market
solutions (Coase, 1937). This is because of
big group sizes, high transaction costs and
unclear property rights in urban areas. Per-
haps one should add to the critique of
Coases analysis applied in the city that, in
conditions of marked power asymmetry (for
example, where one of the parties is a neigh-
bourhood of low-income households and the
other a multinat ional company), then negoti-
ated solutions will also tend to break down
and the poor will pay.
No treatment of equity and public goods in
the city is complete without brief consider-
ation of the Tiebout hypothesis (Tiebout,
1956; Oates, 1969). Tiebout considers the
class of public goods which are local in
nature (they are supplied only in a specic
jurisdiction and there are no spillovers). His
consumer-voters are perfectly mobile and
will move to the jurisdi ction where the tax-
service mix corresponds to their preferences.
Each ends up paying a tax-price for a service
that corresponds to their marginal benet and
all marginal benets are therefore equal in
the jurisdiction, as
MBi 5
pQ
n
(8)
where, MBi 5
marginal benet accruing to
person i; Q is quantity provided (consumed);
p is its unit price; and n is the number of
taxpayers.
It follows that the efcient level of pro-
vision of the public good is given by adding
the (identical) n individual demand curves
vertically:
oiMBi 5
MC (9)
Then for a unit of the public good:
oiMBi 5
nMB
5
n(p/n)
5
p
5
MC (10)
Each voter/consumer pays p per unit of the
public good, corresponding to his valuation,
and incidentally, creating a Lindahl equilib-
rium. By choosing to live in a particular
location, each person chooses a specic
pricequantity combination and has, in es-
sence, revealed his preferences. However,
given the fact that local expenditure (in the
US) is nanced principally from property
taxes, then free-riding can occur if new en-
trants build cheap houses. The solution to
this dilemma is the US zoning arrangement,
which dictates minimum lot sizes.
One consequence of the Tiebout model is
that there is no income redistribution: you
pay for what you want and zoning laws
prevent free-riding. To the extent that
cheaper housing exists in areas with more
expensive housing, then some income redis-
tribution will occur, though in the long run
the value of the better services will be capi-
talised, eliminating the income redistribution
effects. One further aspect of the zoning laws
is the exclusion of blacks and other ethnic
groups from homogeneous suburbs: to the
problem of lack of income redistribution is
added that of discrimination. A local pro-
gressive income tax will clearly undermine
the processes modelled by Tiebout.
It seems that suburbs do show some ten-
dency to be homogeneous and particularly in
the case of the US there is some suppor ting
evidence for the Tiebout hypothesis. Europe
is perhaps different, as there is a tendency
EQUITY ISSUES 879
for the state to require similar if not identical
levels of public good provision in all juris-
dictions. However, some traces of the model
can be found. In the Greater Copenhagen
region, the richer northern suburbs tend to
have lower rates of municipal income tax (a
propor tional tax) whilst maintaining mini-
mum levels of public service provisi on
where required by the state, and lower levels
of service where the municipality has discre-
tion. Inux of poorer households who might
wish to benet from the tax regime is limited
by development control s on social housing
and at the same time the cost of private
housing is high (Andersen, 1987).
5. Urban Policy (2): Equity
Urban policy has strong origins in the politi-
cal will in many city administrations to re-
duce social inequal ity and solve problems of
poverty. Equity and efciency questions can
be examined in this light. The traditional
backbone of much urban policy, equity, is
being replaced by a more entrepreneurial
urban policy embracing ideas of competition
between cities (Jensen-Butler, 1996a). This
has led Edwards (1997, p. 825) to comment
that
one is struck by the extent to which the
problem of urban deprivation has disap-
pearednot from cities, but from the
literature.
There are clear political reasons why cities
tend to get involved in issues of equity.
When reallocation of income through mea-
sures that operate at the national level does
not succeed in solving serious problems of
poverty and deprivation, the poor and de-
prived, who are relatively immobile, turn to
local politicians and administrations for solu-
tions to their problems. These problems can
be very severe, as experience in British and
American cities suggest (Lawless, 1989;
Bradbury et al., 1982) and distributional
questions emerge as a key political issue in
cities. In addition, larger European cities
have traditionally been strongholds of Social
Democratic parties with a policy orientation
towards redistribution of income. Equity is-
sues are rst examined in relation to systems
of taxation and then in relation to service
provision policies.
5.1 Systems of Taxation
Before examining specic policies, initial
consideration is given to the concepts of
horizontal and vertical equity in relation to
the ability to pay and benet principles, relat-
ing in turn to the efciency and equity of
systems of taxation and benet provision.
This is not the place for a major digression
into the theory of taxation, but some con-
sideration of the central issues is appropriate.
The city and macroeconomic policy: income
maintenance policy. The greatest single
inuence on income distribution in cities
arises from changes in the system of tax-
ation, income transfers and public expendi-
ture at the national (and to a more limited
extent at the European) level. Taxation and
transfer incomes can reduce disparities in
disposable income markedly (Atkinson,
1996). As households of different socioeco-
nomic status are not distributed randomly in
space, spatial equity will also be affected
directly.
Spatial ows of public-sector revenue and
expenditure arising from policies at the na-
tional level which in themselves do not have
explicit spatial objectives, are substantial in
advanced economies. The net ows are typi-
cally markedly larger than public expenditure
ows that have a specic and intended spa-
tial bias. In general terms, the net balance of
such ows is positive for poorer areas, as
richer areas have a higher tax incidence and
poorer areas have propor tionately a greater
number of recipients of transfer incomes.
Oosterhaven and Stoffelsma (1990) present
results to this effect for Dutch regions and
Hansen and Jensen-Butler (1996) document
similar ndings in Denmark.
This general pattern of decit and surplus
is to be found at low levels of spatial disag-
gregation, including small areas within cities,
where per capita disposable income can be
affected markedly by changes in welfare
state provisions and taxation levels, as shown
below in section 7. Given that state income
tax systems are generally progressive, tax
reductions will favour rich areasthough
when indirect, induced and dynamic effects
are taken into account, the picture can be-
come less clear (Jensen-Butler and Madsen,
1998). Correspondingl y, reductions in trans-
fer incomes will hit poor areas hardest. This
partly explains Greens (1996) observation
that social polarisation within major cities in
the UK grew in the 1980s, being the urban
counterpart of a more general tendency for
income inequality to grow substantially in
the UK in the 1980s, unlike the trend in most
west European countries (Atkinson, 1996).
One reason why a high number of British
cities appear in both Cheshires (1990) and
Levers (1993) studies at the high end of the
problem index scale is the lower level of
income transfers in the UK compared to
other European countries. In 1994, income
transfers to households constituted 16 per
cent of GDP in the UK, 21 per cent in
Denmark, 26 per cent in Sweden, 19 per cent
in Germany, 28 per cent in Holland and 25
per cent in France. Taking all social expendi-
ture (a denition based on harmonised data
from the EU), the gap is smaller. In 1995,
this expenditure constituted 28 per cent of
GDP in the UK, 34 per cent in Denmark, 36
per cent in Sweden, 29 per cent in Germany,
31 per cent in Holland and 31 per cent in
France (Danmarks Statistik, 1998, pp. 18
19).
A specic urban bias can, however, enter
policies based on national transfers. First,
there is the positive effect on equity within
cities arising from nance made available
because of special needs. In the UK, one
component of central government grant-aid
has since 1990 been Standard Spending As-
sessments whereby a part of grant allocation
is based upon a formula for needs assess-
ment. Secondly, there are activities for which
there is local authority discretion in spend-
ing. Above a basic national minimum stan-
dard provision, cities can choose to spend
more or less in areas which create a more or
less even distribution of income. Social hous-
ing, education and nursery provision often
provide examples of these activities.
Local taxation and expenditure. The general
principle that public expenditure which
benets a population should be nanced by
taxes raised in the same population helps to
create budget ary discipli ne. However, a num-
ber of problems render this principle difcult
to apply. First, the need for public expendi-
ture is not related to the ability to nance it.
Secondly, substantial differences in provision
of basic services would arise in different
local authority areas if it were applied rigor-
ously. Thirdly, budgetary decits are gener-
ally not permitted at local authority level,
limiting local authorities capacity to respond
to changes in the business cycle in a differen-
tiated manner.
At national level in 1993/94, UK central
government grants constituted about 56 per
cent of local authori ty income (Blackman,
1995). In Denmark, in 1997, 67 per cent of
local authorit y income came from state
sources, whilst the power of decision over 55
per cent of public expenditure, nominally at
least, rested with local authorities. In Latin
countri es in Europe, the percentages of cen-
tral government nance at local government
levels are signicantly higher and decision-
making remains very centralised. Throughout
the past two decades, there has been a ten-
dency for responsibility for service provision
under the welfare state to be delegated to
local authorities who thereby, nominally at
least, gained greater power of decision over
expenditure. This has led to pressure for
increased central government control, both
direct and indirect, on local government
spending. The UK (Blackman, 1995) and
Denmark (Hansen and Jensen-Butler, 1996)
both provide examples of this trend.
Taxation for the purpose of nancing
transfer incomes to low-income households
is, in general, a national and not a city-level
issue. Hence, the ability of the city to change
resource endowments of households by di-
rect reallocation of income is severely lim-
ited. Even where there appears to be some
EQUITY ISSUES 881
degree of local nance of income suppor t, as
for example in Denmark, this is in reality
illusory, as entitlements are determined at
national level and the state nances 50 per
cent of expenditure, the rest being met by the
municipality. Hence, in general, cities can
only address problems of distribution by in-
tervention in the market, inuencing prices
and investment decisions and providi ng pub-
lic goods. The second welfare theorem indi-
cates that this will lead to inefciency,
implying a trade-off between efciency and
equity. However, this is not always the case.
It is far from clear whether or not the
raising of local tax revenues to provide sub-
sidised public services creates a more equi-
table reallocation of income. This depends on
a number of questions:
(1) Tax incidence: the question of who
pays? This in turn relates to the geo-
graphical location of taxpayers and their
position in the economy together with
their ability to pass on taxation to others
(in the case of business taxes).
(2) The nature of the local tax system,
whether it is progressive, propor tional or
regressive.
(3) The distribution of benets by income
group and their geographical location.
(4) The types of public service which are
provided by the city authori ty and those
which are provided directly by the state.
These questions are complex and vary sub-
stantially between countries. For example, in
the UK local taxation is based on the value of
property. It is not paid by a part of the local
population in any area, but is reasonably
progressive in relation to those who do pay.
In Denmark, local taxation is on incomes,
using propor tional tax rates, whilst state in-
come tax is progressive. Small changes in tax
thresholds can affect the distribution of dis-
posable income. On the expenditure side,
some countri es have highly centralised de-
cision-making and nance. For example, in
Portugal the state determines the location and
size of primary schools, which in other coun-
tries is a municipal responsibility.
These issues can be viewed in relation to
two principles of equity. Horizontal equity
requires that individuals in the same circum-
stances pay the same costs and receive the
same benets (equal treatment of equals).
Vertical equity determines the distribution of
total costs or benets to people in different
circumstances (unequal treatment of un-
equals). On the benets side, horizontal eq-
uity requires that the same price is charged to
all and that equal incomes pay equal taxes.
Vertical equity is achieved when individuals
receiving different benets pay different
amounts. For a private good, increased con-
sumption involves greater cost; whilst for a
public good, those experiencing higher mar-
ginal benets should, in principle, pay more.
The importance of such issues is clearly
demonstrated by the fate of the highly re-
gressive UK Poll Tax, having a universal
incidence. Urban rioting was provoked by
the tax and by 1992 local councils had
issued 11 million summonses and had 1.5
billion outstanding as a consequence of
widespread civil disobedience.
A city which has a local tax system which
is progressive, having a substantial grant in-
come from the state based upon progressive
taxation, and which locates free or subsidi sed
public services in low-income areas, is prac-
tising a policy of income redistribution at
city level.
However, the difculties relating to
identication of incidence of benets and
taxation do not end here. Any analysis must
confront the problem of whether to assess
only the direct effects of changes in taxation
and service provisi on or whether to incorpor-
ate the indirect and induced effects. In ad-
dition, there will be long-term dynamic
effects on the national economy as wage
rates and employment levels adjust. These
dynamic effects will also have a spatial di-
mension (Jensen-Butler and Madsen, 1998).
Furthermore, analysis should be undert aken
in an interregional framework, as there can
be extra-urban spillover effects.
5.2 Service Provision
Any type of public service provision
involves two main questions. First, in the
absence of market signals, the efciency
question is whether or not the service is
being supplied at the optimum level, where
this level is dened as that which equates
marginal social benet with marginal social
cost. The second question deals with the
effects of the service provisi on on equity.
Here, the effects of the policy on income
distribution are of prime interest but, in prin-
ciple, unpriced benets and costs should also
be included. These two questions are exam-
ined in relation to three traditional areas of
urban policy: housing, transport and special
needs. In principle, similar analyses could be
applied to other policy areas, such as edu-
cation and health, though these typically
have larger national components of
provision.
Geographical location also affects equity
fundamentally, in two ways. The location of
public services in low- or high-income areas
addresses distributional issues directly. Here
any city authority will face a dilemma posed
by the demands of horizontal and vertical
equity. Also, location patterns of interrelated
activities (residence and shopping, residence
and work, for example) affect equity through
travel and co-ordination costs.
In geographical studies, there has been a
long tradition for regarding accessibility as a
fundamental component of equity (Knox,
1982; Hay, 1995). The typical approach to
this type of analysis has been cartographic.
However, more recently, systematic attempts
have been made to examine real accessibility
costs and their incidence on different social
groups in cities. Using data from Chicago,
Immergluck (1998) found that reduction of
spatial mismatch between jobs and unem-
ployed people had a limited effect on em-
ployment compared with other factors such
as occupational mismatch. However, Ong
and Blumenberg (1998) did nd a strong
relationship between improved accessibility
to employment and probability of nding
employment for welfare recipients in Los
Angeles. They were able to quantify this
relationship and, in addition, to estimate the
effect of commuting costs on earnings for
this group, which is necessary, they argue, as
the effect of job accessibility on wages can-
not be separated from its effect on
employment.
Housing. Social inequal ity translates into
spatial inequal ity in cities primarily through
the housing market (van Weesep, 1996). Fur-
thermore, housing has been shown to play a
major role in the creation and maintenance of
deprivation (Lee, 1994). The housing market
is also the prime agent in social segregation
along ethnic as well as social class lines (Rex
and Moore, 1967).
Housing policies have traditionally been
heavily equity driven, the aim being to en-
sure that everyone in the city has affordable
housing of a minimum quality. As there is a
strong correlation between sub-standard hou-
sing and poverty, this is an important area for
the application of equity-based policies. Fur-
thermore, it is typically an area for which
city authorities have direct responsibility.
There are also efciency grounds for pub-
lic intervention in the housing market. Capi-
tal market imperfections include housing
credit agency discrimination against low-in-
come groups or refusal to nance purchase of
housing in certain areas. There are substan-
tial problems of imperfect and asymmetric
information in relation to property purchase.
The supply of housing is highly inelastic
which means that any sudden increase in
demand will create major price increases and
a very limited increase in supply of housing,
having negative consequences for low-
income groups. There are also substantial
externalities in housing consumption, as seen
above. The incentive to improve property in
a slum area is weak because even if one
owner decides to improve his property, the
area will remain dominated by slum condi-
tions unless there is co-operative behaviour
amongst a large number of actors. Conse-
quently, there is little incitement to act. The
behaviour of neighbour s affects housing pur-
chase decisions, which can be clearly seen in
an area experiencing gentrication. In the
face of these market conditions and with the
aim of pursuing equity goals, three types of
housing policy have developed.
EQUITY ISSUES 883
Rent control has a redistributive effect in
the short term, but its long-term conse-
quences are negative, the principal effects
being a housing shortage, less housing
maintenance and long-term decline in sup-
ply. Rents will increase in uncontrolled hous-
ing and owner-occupier prices will rise
(Albon and Stafford, 1987). The long-term
effects on equity will almost certainly be
negative. In some countri es, rent control is a
local authority responsibility, whilst in others
it is determined at national level.
The second option is provision of public
housing which, in theory, increases elasticity
of supply and partly solves the problem of
maintenance in the face of negative external-
ities. This latter problem disappears when
there is only one owner, the transaction costs
associated with collective action being zero.
However, cost constraints faced by many
local authorities have resulted in widespread
lack of maintenance and decay. For example,
it is estimated that a substantial percentage of
council houses in Dundee suffer from hu-
midity problems. Public housing provisi on
means essentially that low-income tenants
receive a rent subsidy, but that they cannot
choose the quantity and quality of housing
according to their preferences.
The third option is payment of housing
subsidi es to provide the consumer with
greater choice of quantit y and quality of
housing without providing general income
suppor t. One argument for not providi ng
general income suppor t is that housing is a
merit good; the consumer does not realise its
true value and therefore tends to undercon-
sume in relation to the real optimum, given
his preferences and budget constraints. There
is an argument for a minimum basic pro-
vision of merit goods, both in terms of quan-
tity and quality.
It is straightforward to show that both in
terms of the consumers welfare and costs,
income subsidies are preferable to housing
subsidi es (if the merit good issue is ignored),
which in turn are preferable to public hous-
ing provision with xed quantity and quality
(Richardson, 1978, p. 353). However, in-
come and housing subsidies are often a mat-
ter for central government. Hence, provision
of social housing remains the principal op-
tion for city authori ties. One curious effect of
social housing provisi on has been the relo-
cation of the poor from low-quality, high-
density housing in the centres of cities to
suburban and peripheral housing estatesa
phenomenon which appears to be quite com-
mon in Europe (Lee, 1994). One conse-
quence of this new spatial pattern is
increased locational inequality, as such hous-
ing estates tend to have a poor (costly) loca-
tion in relation to workplaces, shops and
service facilities. They are often reservoirs of
poverty, both real and cultural, exacerbating
problems of crime and juvenile delinquency.
Despite these new forms of inequality, city
housing policies have been fundamental in
income redistribution, as market-based poli-
cies create rather than eliminate housing
need and substantial externalities and other
market imperfections exist. Large-scale in-
come redistribution to solve equity problems
in relation to housing, even ignoring the
merit good issue, seems politically infeasible.
Even in a country such as Denmark, where
income redistribution through taxation and
transfer incomes is substantial, housing sub-
sidies persist.
Transport. As with all types of commodity,
the efcient level of transport consumption is
that at which net social benets are max-
imised. The demand for transport is derived
from the satisfaction of other demands, work,
recreation, shopping. This means that loca-
tion issues are very signicant in determining
benets and costs. Costs can be divided into
three types: private, of which time costs are
important; congestion costs or costs imposed
by a traveller on other travellers; and en-
vironmental costs. Congestion costs and en-
vironmental costs are externalities. In
addition to allocation problems associated
with these substantial external costs, urban
transport projects are often characterised by
major indivisibilities and long periods over
which benets accrue. These elements under-
mine the ability of the market to create
optimal levels of provision and consumption,
indicating the need for public intervention.
Also, transport is often regarded as a merit
good, implying the need for public interven-
tion to ensure equality of access at a mini-
mum level of cost and quality. Given the
existence of substantial externalities and
given the high xed costs of entry into some
transport modes, which promotes monopol y,
it is unlikel y that the market will create an
efcient solution. Also, given the strong rela-
tionshi p between income and car ownership,
it is impossible for an equitable solution to
be created in urban transport. City transport
policy is therefore usually driven both by
efciency and equity considerations.
The case for public intervention on
efciency grounds alone is strong. One strat-
egy is to internalise the external costs, to
which end a variety of strategies is available
including road pricing, parking charges and
petrol taxation. The distributional effects of
these policies are far from clear. Policy-re-
lated changes in travel behaviour will in-
volve time and monetary costs and some
journeys will not be made. The incidence of
these costs on different income groups is
unclear. However, the poorer households
have tended to relocate in the periphery of
cities. Industrial and area-demanding service
employment (such as wholesaling) has done
likewise, which means that low-income
households are faced with longer journeys to
work by car. These journeys often must take
circular and peripheral routes or cross-city
routes, not served well by public transport.
Hence, road pricing and especially petrol
taxation can increase income inequality. One
possibl e consequence of an electronic cordon
around the centre of cities in order to charge
for car use in the city is that property prices
will adjust to compensate, rising in the centre
and falling outside the cordon.
The other main policy alternative is sub-
stantial investment in public transport, even
involvi ng subsidies which can be defended
on efciency grounds alone through re-
duction of external costs of congestion and
polluti on. This strategy will usually improve
equality through increased provision of
cheap and more frequent services. A denser
and higher frequency network will also help
to overcome location disadvantage faced by
low-income groups. However, the strategy is
not without problems. The attractiveness of
bus-based solutions depends in part on sol-
ution of congestion problems created by cars.
Price elasticity for public transport is low and
cross-elasticity to other modes is also low.
Furthermore, cross-elasticity with respect to
time costs is higher than with respect to
money costs. Marked reductions in prices
would, therefore, not increase use of public
transport correspondingly. Existing users
would increase their use, but the main equity
gains would come from new users and in-
creasing use of public transport may slow
journey times. However, this type of policy
initiative would seem to be one where both
efciency and equity gains are possible. This
is shown in Figure 8 as a shift in the trade-off
curve from Figure 2 in a north-easterly direc-
tion.
Special needs. Social care for special-needs
groups such as the elderly, infants and the
disabled is a major task for local authori ties
and substantial equity issues are involved.
Efciency in provision of care is difcult to
establish, as it is virtually impossible to
specify either the nature or the value of the
benets, which is why cost effectiveness
measures are frequently used for investment
analysis. Three interpretations of equity can
be applied in this area: minimum standards;
equal care for equal need; equality of access
to care. A key issue is the distribution of
costs, which rarely fall upon the individuals
involved. Here equity issues come to the
forefront, as market solutions will be highly
inequitable.
If caring is mainly left to close family or
friends, then costs are not distributed evenly.
Care externalities reect the concerns of oth-
ers in society not directly affected by the
need for care. If the city provides acceptable
levels of care for those with special needs,
then satisfaction is derived by others in the
city. This is quite clearly the case in Scandi-
navian societies where special-needs pro-
vision is at very high levels, but it is less the
EQUITY ISSUES 885
Figure 8. A policy-i nduced shift in the equityefciency trade-of f curve.
case in the UK. There is no relation between
the need for care and the ability to pay for it
and without major public-sector partici-
pation, the burden of care is certainly not
equitably distributed.
Providing for special needs by city author-
ities is an activity that is principally equity-
driven as benets are difcult to measure. It
is, however, interesting to speculate on
whether or not the image of a caring com-
munity based upon egalitarian access is a
positive externality that could make a city
more attractive to inward investment and
economic activity. In which case, the result
of strong city policies in this area could also
be as shown in Figure 8.
Service provision: general conclusions.
These three examples illustrate that in these
areas of urban policy efciency and equity
issues are inextricably intertwined. Policies
designed to increase efciency can some-
times increase social equality and vice versa.
6. Urban Policy (3): Local Economic
Development, the Urban Policy of the
Future?
Many authors have suggested that urban
policy has entered a new phase of entre-
preneurialism (Harvey, 1989). The emerging
entrepreneurial urban policy is one where the
primary concern is with long-term efciency,
where the creation and enhancement of
localised positive externalities becomes a
central goal of urban policy. Instead of
correcting market breakdown, the emergence
of positive externalities is actively encour-
aged, as these are related to increasing re-
turns and ultimately to long-run growth
(Jensen-Butler, 1996a). Cities compete in-
creasingly across national borders and com-
parative advantage is no longer based upon
resources or cheap or productive labour, but
on innovative capacity. External economies
are strongly associated with cities, so that the
cities will become the major actors in the
new global economy. This in turn implies
that the main concerns of urban economic
policy have become transformed and include:
enhancement of innovat ion and creativity;
improvement of the quality of human
capital;
promotion of entrepreneurial vitality;
promotion of networks (networks involve
positive externalities);
enhancement of amenity value and hous-
ing in the cities to attract a high-income
and creative labour force;
creation of synergies;
risk bearing.
In this approach to urban policy, increased
competitiveness of the city will create in-
come and employment which, it is assumed,
will increase income levels for the most dis-
advantaged. As noted above, this is remi-
niscent of a Rawlsian approach to equity that
will not necessarily create a more egalitarian
income distribution. It is possibl e to interpret
Glasgows policy-based transformation of re-
cent decades in this light (Lever, 1996). Two
principal elements of concern arise from this
approach to policy in relation to equity. First,
it is not immediately clear that in the more
individualised, entrepreneurial and less col-
lective society there will be a continued pol-
itical acceptance of redistribution of the
citys rising income to those without employ-
ment. Furthermore, the economic fortunes
of individual cities will become increasingly
divorced from national economies, so that
decisions about income transfer may well be
made more locally and at city level (Jessop,
1991). This can give rise to substantial
differences in levels of income redistribution
between different cities.
New forms of marginalisation and impov-
erishment may arise, more directly based
upon level of access to information networks,
education and training and degree of entre-
preneurial vitality. There is growing number
of community telematics projects in deprived
areas of cities, designed to open the world of
global information ows to underprivileged
young people. This is one response to the
new challenges of marginalisation. Another
response is to create fortied residential
enclaves as is occurring in many American
cities, but this is a solution which is perhaps
less viable in the long term as the world
outside becomes increasingly dangerous.
As argued above, in the new knowledge-
based and global economy, equity may be-
come even more important to ensure
economic growth as the negative externali-
ties related to extremes of wealth in close
proximity will reduce the value of the posi-
tive externalities upon which growth increas-
ingly will depend. However, the emerging
social structure and political values in cities
may well be less sensitive to recognition of
this link.
Space does not allow consideration of in-
teractions between equity issues and the third
dimension of urban policy, environmental
improvement, but these may be considerable.
7. Research into the EquityEfciency
Relationship in the City
For a number of reasons, little work has been
undertaken on the relationship between urban
success in terms of economic performance
and equity in cities, despite the pressing na-
ture of social problems in cities. There is a
paucity of data on income levels for small
areas inside cities which permit analysis of
levels or changes in equality over time. This
lack of data is even more problematic when
it is remembered that disposable income is
the best income measure to use for measure-
ment of such changes. As the theoretical
analysis above has shown, measurement of
changes in levels of equality is complex,
involvi ng changes in tax and benet systems,
as well as unclear issues concerning the inci-
dence on different income groups of changes
in costs and benets as a consequence of
other policy changes. However, if the bal-
ance between efciency and equity at the
level of the city is a key issue determining
competitiveness and future income levels,
the problems must be addressed.
The following example of the city of
Copenhagen illustrates the nature of the data
requirements and the problems involved in
measuring changes in levels of equity. The
example also suggests that analyses of equity
in an urban context conducted at a high level
of conceptual and empirical generality, such
as Smiths (1994) case studies of equity in
selected cities, are of limited value in this
context.
Greater Copenhagen has a populat ion of
about 1.7 million and is the Danish region
EQUITY ISSUES 887
where income levels are highest. However,
during the past two decades, Copenhagen has
been losing ground in terms of economic
performance, with slower growth in GDP
and productivity than much of the rest of
Denmark and other European cities (Jensen-
Butler and Madsen, 1998). Convergence of
levels of disposable income by region has
occurred in Denmark in the past two
decades, with Greater Copenhagen perform-
ing weakly (Jensen-Butl er and Madsen,
1998).
Greater Copenhagen is dened so exten-
sively in areal terms that it is clearly a func-
tional unit. Thus, changes in levels of equity
are not inuenced by out-migration from the
area. It contains three counties (Roskil de,
Frederiskborg and Copenhagen) and the mu-
nicipalities of Copenhagen and Frederiksberg
which, exceptionally, also have the status of
counties. At the lowest administrative level,
Greater Copenhagen covers 50 municipali-
ties, for which income data are available.
Data are also available for 65 smaller statisti-
cal districts covering Copenhagen munici-
pality, which has a population of 483 000.
The data have been made available by the
Local Governments Research Institute in
Copenhagen (AKF) and they permit closer
examination of some of the problems in-
volved in measuring changes in levels of
income equality. Data for 1980 and 1995 for
the 50 municipalities were used. These data
cover:
(A) Taxable income
(1) Gross personal taxable income from all
sources, includi ng capital income and
taxable social benets, such as unem-
ployment benet.
(B) Non-taxable transfer incomes
(2) Child allowance.
(3) Housing subsidy.
(4) Income support .
(5) Supplementary pensions.
(C) Taxation
(6) All types of taxation of income.
(7) Specic labour market taxes.
(8) Interest payments.
The data are available for seven social
groups (dened in relation to qualications)
in each area. From these data, disposable
income can be calculated as 1
1(2 13 14 15) 2(6 17 18). Changes in
the tax system have occurred between 1980
and 1995, income support becoming taxable
and specic labour market taxes being intro-
duced. The data have been adjusted for these
changes, but they do provide an illustration
of the complexities involved with measuring
changes in income equality. Clearly, dispos-
able income is the closest that one can get to
a measure of equality that is purely income-
based.
Copenhagen has been characterised as a
redistributive city (Engelstoft and Jrgensen,
1996). It is also a city in a highly redistribu-
tive country where public expenditure is cur-
rently at a level of 64 per cent of GDP, with
very high rates of taxation, tax incidence
being 52 per cent of GDP. Table 1 shows
calculations concerning income distribution
in 1980 and 1995, where the units of analysis
are the 50 municipalities. Looking rst at
gross income, the coefcient of variation
based on the unweighted standard deviation
and average increases between 1980 and
1995, as does the coefcient of variation
based upon the weighted standard deviation
and average. This suggests a widening of
income dispersion and increasing social in-
equality. However, when disposable income
is examined, the reverse effect occurs. Tax-
ation and non-taxable transfers have reversed
the trend of widening spatial (and social)
income disparities at the level of gross in-
come, creating income convergence. When
the provision of social services, housing,
transport, health and education is taken into
account, it is clear that large-scale redistribu-
tion of income is occurring in the city. How
far this redistribution is related to macro-
economic income redistribution policy and
how far it is locally determined by city-level
policy requires closer study.
A major problem when examining the
effects of taxation or service-level changes
on equity is whether indirect, induced and
dynamic effects are included in the analysis.
Typically, they are not, as this involves a
Table 1. Gross and disposable income in the 50 municipal ities of Greater Copenhagen: averages and
measures of dispersio n, 1980 and 1995 (current prices)
Gross income Disposable income
1980 1995 1980 1995
Average (DKr) 69 022 162 259 38 152 91 467
Weighted average (DKr) 68 095 156 241 39 837 90 952
SD unweighted 8 967 22 488 3 402 7 949
SD weighted 9 863 25 118 3 944 8 118
Coefcient of variatio n, unweighted values (%) 12.99 13.86 10.23 8.69
Coefcient of variatio n, weighted values (%) 14.49 16.08 9.90 8.93
Source: Local Governments Research Institute (AKF, Copenhag en) data bank.
more substantial modelling exercise. Jensen
et al. (1996) have undertaken a model-based
analysis of the spatial incidence of changes
in local authority taxation and spending for
the City (Municipality) of Copenhagen
which includes the indirect and induced ef-
fects. The City of Copenhagen faces a sub-
stantial budget decit mainly because of the
high percentages of low-income and special-
needs households living in the city. The
problem which they examine is the spatial
effects of two different strategies to reduce
the budget decit: reduction of public expen-
diture (in the city, not in Greater Copen-
hagen) by DKr100 million or an increase in
local taxation in the city by a corresponding
sum. The basic geography of income levels
in the region is that in 1993 factor income
per inhabit ant by place of residence in the
City of Copenhagen had markedly lower val-
ues than in the three surrounding counties
and the municipality of Frederiksberg, and
was even marginally lower than the national
average. In terms of disposable income per
inhabitant, the picture is almost reversed.
Income transfers and taxation create the situ-
ation where disposable incomes per inhabi-
tant are higher in the city than in the
surrounding counties, though Frederiksberg
municipality still has higher per capita
values.
Jensen et al. (1996) found that the cut in
public consumption reduces employment by
316 persons in the region, of whom 143 are
resident in the city and the rest in the suburbs
(but work in the city). In addition, there is a
small leakage effect to the rest of the coun-
try. The effects on disposable income are
modest: a reduction of DKr24 million (1980
prices), of which half falls in the city. The
effects of a tax increase are different. Only
96 jobs disappear, of which 36 are resident in
the city. On the other hand, disposable in-
come declines by DKr57 million, of which
DKr51 million falls in the city. Thus, the tax
increase creates less unemployment in the
city region than the cut in public expenditure,
but in spatial terms it reduces the equilibrat-
ing effect of income transfers and taxation
within the region as disposable income de-
clines primarily in the City of Copenhagen.
On the other hand, as a point of departure,
the city had a higher level of disposable
income than most of the rest of the region,
because of income transfers and investment.
These studies of Greater Copenhagen pro-
vide a good example of the conceptual and
empirical difculties involved when the con-
cept of equity is operationalised in a specic
urban context.
8. Conclusions
There appear to be good theoretical grounds
for not accepting the traditional view of a
trade-off between efciency and equity in the
urban context. In many situations, it appears
theoretically that there may be a positive
relationship between increasing efciency
and increasing social equality, at least up to
EQUITY ISSUES 889
some minimum level of equity, leading ideas
back to Figures 3 and 4. This means that
cities that ignore equity considerations risk
inuencing their long-term economic per-
formance negatively. Equity is inextricably
linked to urban policy, even if policy is
designed to address efciency issues. Poli-
cies designed to address market breakdown
in cities have clear implications for social
justice. Policies, such as those in elds of
housing, transport and special needs, devel-
oped primarily for equity reasons, often have
consequences for efciency. Moreover, the
distribution of benets and costs on different
income groups and areas within the city can
have consequences for equity other than
those which were intended. The new en-
trepreneurial policy prole of many cities
raises questions of the need for new
denitions of equity and the adequacy of
policies designed to address new forms of
social inequality.
There is clearly a pressing need for more
research on the relationships between
efciency and equity at the level of the indi-
vidual city. This research task is consider-
able, because of conceptual and theoretical
difculties, data availability and problems of
international comparison. The dimensions of
the task do not, however, make it less urgent.
Cities have traditionally been locations
where equity issues have been addressed in
very concrete forms and this will continue to
be the case.
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is the instantaneous rate at which

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