Network Externalities and City Building

By Ryan McGreal
Published July 08, 2010

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:

  1. Economies of utility - as the number of users on a network increases, each user gets more benefit out of being connected to the network.

  2. 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.

Ryan McGreal, the editor of Raise the Hammer, lives in Hamilton with his family and works as a programmer, writer and consultant. Ryan volunteers with Hamilton Light Rail, a citizen group dedicated to bringing light rail transit to Hamilton. Ryan wrote a city affairs column in Hamilton Magazine, and several of his articles have been published in the Hamilton Spectator. His articles have also been published in The Walrus, HuffPost and Behind the Numbers. He maintains a personal website, has been known to share passing thoughts on Twitter and Facebook, and posts the occasional cat photo on Instagram.


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By Pxtl (registered) - website | Posted July 08, 2010 at 15:48:35

Ryan, I think you're missing a /i

I have a much simpler outlook: think of all the greatest cities. Places you fantasized about living in your youth. New York. Montreal. Boston. London. Paris.

What do they look like? Do they look like spread out two-car garages and expressways and box malls?

No, they look dense. They pack people in like sardines and build streetwalls and stick greenery where they can but screw it if there's no place outside of the park for it. The houses (where there are houses) are three stories tall and packed shoulder-to-shoulder, and parking is not a given. At the densest, they stack people on top of people on top of people on top of people on top of parking garages on top of subways.

It sounds terrifying when it's thought of that way, but remember: these are the places you want to visit, that you want to live. LA the centre of the entertainment industry, but how many people talk about seeing LA? It's not really a place, just a bunch of suburbs.

We like these places. We worship them. We make movies, TV, and novels about them. They're the centre of our zeitgeist.

So why don't we build them? When people obviously like big city living, why do we build sprawl instead? Why do we eschew the excitement of our fellow humankind for long distances between us and choked traffic?

Why don't we build what we obviously seem to like? You can't tell me that it's cost - as mentioned in the header, economies of scale means that high-density living is cheaper. Places like NYC are positive tax bases, not tax sinks.

Comment edited by Pxtl on 2010-07-08 14:50:32

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By AnneMariePavlov (registered) | Posted July 09, 2010 at 09:35:29

"Why does someone choose to live in a 500 square foot apartment in New York City when they could have a 2,000 square foot house in, I don't know, Utica? What does the city offer that justifies the cost and inconvenience?"

Living in cramped quarters in New York or Toronto is acceptable because these cities have thrilling things to do at every corner: great shopping, theatre, concerts, restaurants, and walkability. I personally try to live as a ideal urbanist in Hamilton, without a car, in a cramped condo downtown, on a bus route, but it is sad to say that I could spend the same money for a sprawling home on the mountain if I bought into car culture like everyone else. It's just that I don't drive, so the deciding force for my decision is convenience, plus my old man is disabled and older, and he can't walk anywhere. I am the only one at work who walks or busses to work and lives in an apartment. Everyone else commutes long distances, and lives in a big house, and drives a gas guzzler. This city promotes car culture. The stadium fiasco is only the latest example.

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By michaelcumming (registered) - website | Posted July 10, 2010 at 13:18:31

From my experience in big cities such as New York and London there are lots of people who obviously love living there (such as Canadian ex-pats). People who make the conscious decision to move to such places usually have the autonomy and cash to fully enjoy their time there.

However, in many big cities you also find people who can't really understand how they ended up living with 10 million other people. They may not really be 'city people' at all. If things had worked out differently, they could see themselves living in the equivalent of Utica quite happily.

Lots of people get stuck in places and have little idea how they got there and what they need to do to 'escape.' Even in the best cities quality of life is often a mental construct. It depends on your perspective, history and motivations. We love Hamilton because we made the conscious decision to settle here. If someone had forced us to move here we might see things differently.

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By A Smith (anonymous) | Posted July 10, 2010 at 20:22:08

If we want to increase our share of new development, including downtown condos, how does it make sense to tax each dollar of investment at 50% higher rates than our GTA neighbours? In Toronto, if Johnny Rational-Consumer buys a $180k condo, he will pay $1,530 in taxes.

If he wanted to spend that $180k in Hamilton, he would have to pay $2,754. Assuming that both properties increase in value 3% in one year, that would produce $5.4k in equity gains. However, when you take away the tax costs related to ownership, it leaves him $3,870 assuming he bought in Toronto, but only $2,646 if he bought in Hamilton.

Multiply that $1,200K over a few years and you can see why everybody wants to live in low tax Toronto. It's a great city to build wealth over time. If we had similar tax rates on residential property, we would become known as a great place to invest and this would create the conditions that would turn parking lots into high-rises.

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