With the outrageous Council reversal on a location for the Pan Am Stadium, my thoughts naturally turn to the project of city building - of creating a dense agglomeration of people and uses that provides enough competitive advantage to justify the challenges of coexisting in shared urban space.
These days, many economists refer to the intrinsic economies of cities as Jacobs externalities (after Jane Jacobs) - the measurable boost in the rates of innovation growth and infrastructure productivity that accrue to dense urban development.
When you come down to it, Jacobs externalities are just a specific type of positive network externality - the tendency for a network to increase in value for its users as more people use it.
The telephone is a canonical positive network externality. If you were the only person on earth with a telephone, it would be useless; in fact, the smallest telephone network is a line connecting two phones (even if they're empty tin cans tied together by string). With each additional phone added to the network, the usefulness of the phone increases for all the people already connected.
This positive network externality can scale all the way up - the utility just keeps on increasing as the number of users goes up, as long as the network itself can handle the traffic across it. If the network can't handle the growing traffic, users end up with the negative network externality of congestion, about which more below.
There are two broad types of positive network externality:
Economies of utility - as the number of users on a network increases, each user gets more benefit out of being connected to the network.
Economies of density/scale - as the number of users on a network increases, the average cost per user tends to go down as the fixed capital cost of the network is spread across more users.
The boost in innovation rates in areas is an example of the former, in that dense urban environments bring more people into contact more frequently, producing optimal conditions for creative exchange and innovation.
The boost in infrastructure productivity is an example of the latter, as walkable neighbourhoods make more effective use of water and wastewater systems, reduce the need for expensive road systems, and increase the user base enough to fill high quality transit to capacity.
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