Open + Expand

and why some cities are so big. This chapter, drawn from the Fifth Edition of Urban Economics (McGraw-Hill/Irwin, 2003) explores the where of cities. To address the where question, we’ll examine the location decisions of firms. When a firm chooses a particular location for its production facility, the resulting concentration of employment either generates a new city, or, more often, causes an existing city to grow. Although location theory is usually cast in terms of where new firms locate, it applies as well to the expansion of existing firms. The economic conditions that attract new firms to a city also make it profitable for firms already in the city to expand their operations. In other words, location theory helps us explain both why cities arise in particular locations and why some cities grow more rapidly than others. Figure 1 provides a useful backdrop for our discussion of location decisions and urban growth. A city will grow if the number of new jobs gained from the birth of new firms and the expansion of existing firms exceeds the number of old jobs lost from firm deaths and contractions. The question is whether growing cities have relatively large job gains, or relatively small job losses. The clear message from Figure 1 is that cities diffe