The Challenge of Urban Policy Edward L.

Glaeser

Abstract
Urbanization almost invariably accompanies development, and the cities of India
and China are experiencing spectacular increases in population. The concentra-
tion of millions of people in a small mass creates challenges for public policy, espe-
cially in the areas of basic infrastructure, public health, traffic congestion, and
often law enforcement as well. In this essay, I discuss five core debates in urban
policy, including the optimal degree of federalism, private versus public provision
of urban services, optimal land use regulation, appropriate spatial policies, and
the use of engineering and economics approaches to reducing the negative conse-
quences of density. None of these debates are close to being resolved, but
researchers have managed to generate a number of useful insights in these areas.
© 2011 by the Association for Public Policy Analysis and Management.

INTRODUCTION
More than half the world lives in urban areas, and the growth of these places is sure
to continue as poorer nations develop. Urbanization is closely correlated with
national prosperity, which suggests that the move to cities is an important part of
world economic growth. But the concentration of vast numbers of humans into
densely packed areas also creates enormous policy challenges. If cities are going to
serve as engines of economic success, rather than places of sickness, crime, and
despair, the world will need better urban policies.
At its most elemental, urban policy includes any policy that is particularly rele-
vant for cities. As such, it includes not only housing and transportation, but poli-
cies that relate to urban public health, crime, internal mobility, and federalism.
A basic framework is necessary to make sense of this vast array of public policy
options.
Cities are spatial concentrations of people and companies that form for two pri-
mary reasons: A particular location has some exogenous fixed attribute, such as a
port or coal mine or political capital, and people cluster around that attractor, or
people come together to be close to each other. Typically, modern work on urban
economies (Krugman, 1991; Ciccone & Hall 1996; Glaeser, 2008) emphasizes the
latter force, typically called “agglomeration economies.” These benefits of spatial
concentration include the reduction of transport costs for goods, people, and ideas.
But the spatial proximity that practically defines cities carries costs as well as
benefits. If two people are close enough to engage in trade, they can also rob or
infect one another. For millennia, cities have had to deal with the negative conse-
quences of density, which include contagious disease, crime, and congestion.

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DOI: 10.1002/pam.20631
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In some cases, these problems have been mitigated by private actors, such as the
well-functioning communities that often deter crime with little police presence, but
fighting these externalities has often required extraordinarily intense public action.
In this essay I review the major policy debates that still circle around urban
issues, such as the externalities that cities engender. In the second section, I discuss
two main approaches to these problems: engineering solutions, like aqueducts and
new highways, or interventions that attempt to alter private behavior, like public
health education and congestion charges. I try to make sense of why the engineer-
ing approach appears to have been successful in some areas, like providing clean
water, but not in others, like traffic congestion.
In the third section I turn to a second major area of urban policy: privatization of
public services. While there is robust theory around the costs and benefits of priva-
tization, empirical work is still at a relatively early stage.
In the fourth section I turn to the regulation of the physical environment within
cities. New structures certainly create externalities, so there is a reasonable case for
some regulation. But some of the empirical work in this area suggests that regula-
tion of new construction has gone much too far.
Running throughout all aspects of urban policy is the extent of local control,
which I discuss in the fifth section. In some cases, including the United Kingdom,
national governments are deeply involved in managing the affairs of their cities. In
other countries, such as the U.S. and India, state governments exert significant
power. Some people have argued for more control at the sub-city neighborhood
level, especially over services like schooling. It doesn’t appear that there is one uni-
versal right answer, but rather country and sector conditions seem to favor more
local or more central control.
The final section turns to national policies that impact the growth of subnational
areas. These policies can be very heavy-handed restrictions on urban growth, such
as requiring internal passports for mobility. Alternatively, the central government
can engage in specific interventions that favor particular areas, either explicitly, as
with U.S. Empowerment Zones, or implicitly, as with agricultural subsidies that dis-
proportionately favor lower-density rural areas. The key debate in this arena is
whether the national government should essentially keep its hands off of local
growth or whether the government should try to bolster poorer regions or restrict
the growth of booming areas.

MANAGING EXTERNALITIES WITH ENGINEERING OR ECONOMICS

The negative effects of proximity, if not properly managed, can destroy the quality
of life in any urban area. The most fearsome urban externality is contagious dis-
ease, which has stalked cities since the dawn of recorded history, when Thucydides
described the outbreak of plague that crippled Athens and killed Pericles himself.
As late as 1901 the life expectancy of a male child born in New York City was seven
years less than in the U.S. as a whole, and life expectancy in Mumbai today is seven
years below the Indian average. Fires that spread from home to home have leveled
cities from London to Chicago. Congestion of roads continues to bedevil many
urban areas. Criminal activity, which is also facilitated by closer proximity between
criminal and victim, can also be seen as a painful urban externality.
While there are many important empirical debates about fighting these scourges,
one basic policy debate can be framed as engineering versus economics. Engineering
approaches focus on physical solutions to the problem. Economics-oriented
approaches emphasize changing individual incentives that impact behavior, and in
this case, I combine regulation, taxes, and subsidies as part of the economic
approach. Perhaps the clearest example of this dichotomy lies within the area of
traffic congestion, which is fought commonly by building new roads (an engineer-
ing approach) or more rarely by introducing incentives, such as congestion pricing,

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that induce drivers to avoid congested roads (an economic approach). Of course,
the engineering approach still needs economics to calculate cost–benefit ratios and
the economics approach often needs plenty of help from engineers in implement-
ing tolls, for example.
In the case of public health, the engineering approach is epitomized by 19th-centu-
ry public projects piping clean water in cities. The economic approach is seen only
in relatively recent attempts to provide incentives for poorer people to get better
health care, such as Mexico’s Progresa program. For crime, the same intervention—
imprisonment—combines the engineering and economic approach. Since Becker
(1968), economists have argued that the threat of punishment reduces criminal
activity by changing incentives. But prisons also create a massive physical barrier
between crime-prone individuals and the general citizenry, which would presum-
ably reduce crime even if long jail sentences had no incentive effects whatsoever. In
principle there can be pure incentive approaches (fines or short-term physical pun-
ishment), or pure engineering approaches (better lighting or locks).
Limited resources typically mean that there is a trade-off between the two
approaches. The money spent on Mexico’s Progresa program could presumably
have been used to build better water facilities. Even in crime, where the engineered
isolation of convicts provides a key incentive, there is a trade-off between imposing
longer sentences on criminals whose release creates the greatest threat and on
crimes that respond most clearly to incentives.
The engineering approach can be seen as essentially providing more usable space
to a crowded urban area. Great water works projects, like New York’s 19th-century
Croton Aqueduct, can be understood as allowing New Yorkers to access the clean
water produced by low-density areas outside the city. More roads provide more
driving space, and even prisons are essentially extra, specially designed housing
units provided for urban residents.
A simple equation helps illustrate when engineering or incentive approaches are
likely to enjoy greater success. I assume that social losses are a function of some
activity (driving, producing sewage) divided by area, which can mean the number
of drivers per mile of road or the number of people drinking and using water rela-
tive to the water resources. The amount of activity is determined by its total cost,
which equals price plus noncash costs, and the noncash costs are denoted
 Activity 
K   . Like social losses, these costs are determined by amount of activity
 Area 
per area. I assume that

   Activity   
Activity  Price ⫹ K 
 Activity 
   Area   
Losses ⫽ L  ⫽ L  
 Area   Area  (1)
 
 

The engineering approach increases the effective area; the economics approach raises
1
the price. The impact of a marginal increase in area on social losses equals
Area

 Activity  Activity ∂Activity  Activity  Activity

⫺ ⫺ K ⬘ 
L⬘   times Area ∂Cost 
 Area  ∂Activity  Activity 
 Area  Area ⫹ K ⬘  
∂Cost  Area  .
The first term reflects the direct impact of engineering, which lowers social losses.
The second term reflects an offsetting feedback effect; more area elicits more behavior.

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When activity is fixed, this term disappears, but when activity responds sharply to
incentives, the reduction in social losses can be substantially diminished.
1  Activity 
The impact of an increase in price on losses will equal L⬘   times
Area  Area 
∂Activity
∂Cost , which depends on the responsiveness of the activity to its
∂Activity  Activity 
1⫺ K ⬘  
∂Cost  Area 
∂Activity
price. As increases in absolute value, prices will more strongly reduce
∂Cost
social losses, although some of this effect is offset because lower congestion levels
attract people to the activity.
The engineering approach is essentially increased provision of a pseudo-public
good, like a road. The economic approach is essentially about pricing that public
good. Regulation can also be brought in as an attempt to directly reduce the amount
of activity, and the usual advantages and disadvantages of using quantity controls
would become relevant.
These equations suggest that the engineering approach will be most effective
when the supply response to the new infrastructure is minimal. The incentive
approach will be most effective when the supply response to higher costs is high.
This logic provides some guidance as to where engineering or economics provides
the better tools for fighting urban externalities.
In public health, engineering approaches have enjoyed dramatic successes.
Mortality declined sharply as 19th-century cities built sewage systems and large
aqueducts that piped water in from lower-density areas. In this case, supply respons-
es, such as generating more waste, seem to have been reasonably modest and incen-
tive approaches are hard to imagine. The supply response was, of course, mixed
with public provision and management.
A tax on drinking bad water in disadvantaged areas would be absurd, politically
infeasible, and impossible to enforce. Subsidizing clean water is more feasible polit-
ically, but it would also require significant monitoring and creates the potential for
corruption. Before building the Croton Aquaduct, New York City tried subsidizing a
public water company. The highly political deal that created the subsidy, which took
the form of a bank charter, was crafted by Aaron Burr and Alexander Hamilton. The
end result was the successful Bank of the Manhattan Water Company (now part of
JPMorgan Chase), which provided relatively little water.
Indeed, more use of incentives in public health is just now starting to be seen. The
Progresa program in Mexico provides cash transfers conditional upon families
receiving preventive health care and nutritional assistance (Gertler & Boyce, 2001).
Mayor Bloomberg adopted this approach in New York City and paid poorer families
to get medical and dental care.1 The Progresa program was associated with a 23 per-
cent reduction in illness, which is impressive but still seems far less significant than
the reductions in disease associated with piping clean water into cities.
In traffic congestion, the engineering approach (e.g., building new roads) has also
been popular, but it has been troubled by a powerful supply response. Recent work
by Duranton and Turner (2009) finds that vehicle miles traveled increased almost
one for one with the provision of new roads, which means that the new infrastruc-
ture did little to eliminate the externality.
The other approach, associated with Vickrey (1969), is to use incentives, in this
case congestion pricing, to change people’s behavior. Congestion pricing has been

1 http://www.rockefellerfoundation.org/uploads/files/293eed49-2a6a-4f2e-9cdc-e9a3fa69d98e-mayor.pdf.

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successfully used by Singapore since 1975 (Goh, 2002). London traffic also fell sig-
nificantly after it instituted fees to discourage motorists from driving in the city
center (Walder, 2007). While the track record of infrastructure seems strong in the
area of clean water and public health, behavioral incentives seem to work better in
the area of congestion.
Separating out the relative efficacy of engineering and economic approaches in
crime is more difficult since jail combines both incentives and physical isolation.2
Levitt’s (1996) work on prison release shows that letting prisoners out of jail
increases crime. This finding illustrates the importance of the incarceration or engi-
neering approach, since prison releases do not seem to impact the expected punish-
ment from future crime. Additionally, there is also evidence showing that criminals
respond to incentives, as illustrated by the increase in juvenile crime associated
with reductions in punishments faced by juveniles relative to adults (Levitt, 1998).
The negative consequences of urban density can create severe externalities, which
can be reduced either by engineering approaches that essentially reduce the effective
density or by economics approaches that use incentives to reduce the externality-
creating behavior. Scholars will continue to debate the merits of the two approaches
for years to come, and assuredly the right approach will depend on local character-
istics, particularly the tendency of behavior to respond to new construction and
pricing.

PUBLIC VERSUS PRIVATE PROVISION IN LOCAL GOVERNMENT SERVICES

In some cases it is commonly accepted that a service, such as street cleaning and
policing, must be provided, typically to reduce negative externalities. But should
these services be provided by the government itself or by private entities that either
contract with the government or perhaps with private individuals?
Hart, Shleifer, and Vishny (1997) put forward an elegant theory of optimal private
provision. In their framework, private firms had stronger incentives to cut costs.
Those incentives led to social gains by eliminating wasteful spending, but also
social losses, which came from cutting noncontractible quality. If the private
provider pays for lower quality in the form of lower prices, then private provision
works well, but if lower quality can’t be observed, or if lower quality creates exter-
nalities, as in the case of bad water, then private provision can be quite imperfect.
If the private provision is paid for with public subsidies, then a second problem is
that the interaction between the public contractor and the government may lead to
corruption (Glaeser, 2002).
There is an abundant empirical literature on privatization, surveyed by Netter
and Megginson (2001), but much of that literature focuses on the financial perform-
ance of state-owned enterprises rather than on the broader impacts of contracting
out city services. A private water company might well be more financially prudent
than a public utility, but that doesn’t mean it will provide cleaner water.
Certainly, the historic track record of privatizing city services is quite mixed.
Street cleaning in New York City, for example, was provided by private contractors
throughout much of the 19th century. These companies regularly paid kickbacks
to politicians, and the streets certainly did not get clean (Glaeser, 2002). The move to
public provision, under leaders like George Waring, seems to have created cleaner
streets, albeit at a significantly higher cost. However, it is less obvious that contract-
ing out street cleaning today would have the same negative consequences that it did
in the 19th century.
In the early 19th century, New York City tried to provide clean water by implicit-
ly subsidizing a private entity, the Manhattan Water Company, by giving them the abil-
ity to start a bank. The Bank of the Manhattan Water Company thrived, becoming
2
Building defensible space, as advocated by Oscar Newman, is another engineering approach to crime.

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Chase Manhattan bank, but water provision was minimal. By contrast, Philadelphia
opted to spend more for public water provision, with far more satisfactory results.
Troesken and Geddes (2003) certainly found positive health consequences associat-
ed with the switch from private to public water provision. Again, it is less clear that
whether this pattern would hold today.
Perhaps the most contentious area of private provision is the area of public edu-
cation, where many American cities have begun allowing private “charter” schools
to compete with purely private entities. Many charter schools have achieved
remarkable successes (Hoxby & Murarka, 2009), but some have performed less
well. Angrist et al. (2011), for example, finds substantial test score gains associated
with urban charter schools, but none in suburban charter schools. Importantly,
though, these results typically evaluate only those schools where there is enough
demand so that students are admitted by lottery, and these are surely the better-
performing charter schools. Still, many other countries, such as Chile and the
Netherlands, have longer traditions of school choice and have generally achieved
positive results.
One area where purely public provision is generally thought to be a failure is
housing. Certainly, the U.S. experience has been mixed at best (Husock, 2003).
Vouchers have typically been seen as being more efficient than purely public provi-
sion within the U.S. But public housing is widespread in Singapore, and the expe-
rience is far more positive, which suggests that a sufficiently competent government
can provide even the trickiest of commodities.
The debate over private provision of public services is central to urban gover-
nance, yet the evidence on this topic is quite murky. There are some historical
examples which suggest that private provision has limits, but other areas, such as
charter schools, that speak quite well for the private model. Clearly, more research
in this area is critical.

THE REGULATION OF THE BUILT ENVIRONMENT: PROPERTY RIGHTS VERSUS

COMMUNITY CONTROL
Even when private innovators dominate infrastructure provision, as in the case of
housing, urban governments typically exercise a great deal of regulatory control.
Builders face construction standards, various forms of height limitations, controls
over usage and external adornment, and rules that can tightly protect older build-
ings. The typical justification for these controls is that buildings can create exter-
nalities. Poorly constructed buildings can create fire risks. Tall buildings block out
light. Significant older structures may be an important aesthetic part of the urban
landscape.
Asymmetric information provides a secondary justification for regulation of qual-
ity, and this may be relevant in construction as well. If buyers find it costly to verify
the quality of every aspect of a home or apartment, then it can be useful to main-
tain some form of minimum quality level. Seller reputation, which can ensure qual-
ity, in markets with repeated sales is less likely to be relevant, and buyers typically
need to hire building inspectors.
While there is a nondebatable justification for some regulation of construction
and land use, there is plenty of debate over whether the current amount of regula-
tion is efficient or appropriate. The great cost of restricting building is that if less
new space is built, this may drive up the cost of space and may ultimately make a
city far less affordable and inclusive.
A first empirical question over these policies is whether they meaningfully impact
both quantities and prices. There are two approaches to this question. The more
straightforward approach is to estimate the impact of regulation on building
and prices by comparing across jurisdictions and over time. For example, Katz and
Rosen (1987) look at the imposition of growth controls on California communities

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and observe that they both restrict growth (unsurprising, perhaps, since that was
the point of the policy) and increase price. Across metropolitan areas, overall meas-
ures of restrictiveness predict both higher prices and less building (Glaeser &
Gyourko, 2003).
A second empirical approach to estimating the impact of regulation relies on esti-
mates of construction costs. If building is unrestricted, then conventional econom-
ic logic suggests that building should proceed until the point where marginal costs
equal marginal revenues, which in this case means that the price of space equals the
marginal cost of construction. Glaeser, Gyourko, and Saks (2005) present a variety
of estimates of construction costs and argue that Manhattan prices have recently
been more than double the marginal costs of new construction.
Given that these rules do seem to matter, the major policy debate then becomes
whether the benefits of these regulations outweigh the costs. For any individual
project, the decision to block the project is optimal if the externality losses created
by the project are greater than the net benefit from the project, which is typically
understood as equaling the difference between the sales price and construction
costs (Glaeser, Gyourko, & Saks, 2005). Even when there are reasonable estimates
of prices and construction costs, there are rarely compelling estimates of the nega-
tive externalities associated with building.
One way to estimate the cost of losing views due to new construction is to com-
pare the price of comparable apartments on higher and lower floors in the same
building. Glaeser, Gyourko, and Saks (2005) find that higher apartments typically
sell at a 20 percent premium relative to lower apartments in Manhattan, which sug-
gests that blocking the view of an apartment may destroy up to one-fifth of its value.
More generally, it is hard to know whether building the city center up carries net
positive or negative social costs. Building in the city center may create negative
effects from more foot travel in the city, but it reduces driving in the crowded high-
ways on the city’s edge by reducing building on the exterior of the city. Glaeser and
Kahn (2010) estimate carbon emissions associated with new households in differ-
ent parts of the city and find that environmental damage is lower when more peo-
ple live in the city center than on the fringe.
The negative externalities associated with growth may be largest in the develop-
ing world, where the public sector has trouble managing the downsides of density,
like congestion and contagious disease. Of course, there may be positive effects of
urban migration in the rural areas as competition for land in those areas decreas-
es.3 Height restrictions in Mumbai, for example, have for decades been seen as tools
to restrict the area’s growth. Yet the area has grown despite the controls, often in
informal settlements that evade land use controls altogether.
The externalities associated with preservation are even more difficult to measure.
It is easy to argue that Paris is over-regulated, but since so many people love the
city’s older buildings, estimating the benefits of these regulations is quite difficult.
While most of the work on the impact of regulations has been done in developed
countries, the need for more analysis may be greatest in less developed countries.
Mumbai has had highly restrictive regulations since the early 1960s and has
restricted buildings in the city center to an average floor area ratio of 1.33, mean-
ing the average building height is one and a third stories. One justification for these
controls is that they were an attempt to reduce the growth of the city, but they don’t
seem to have had much success at that. Mumbai now has extremely high prices and
an extremely sprawling cityscape, which has surely been encouraged by these
restrictions. It is hard to argue that these limitations have had large positive effects,
since they often discourage modernization of the building stock.

3 These benefits would only be externalities if property rights over land or other congestible resources are

ill-defined, which is often the case.

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FEDERALISM VERSUS LOCAL CONTROL

One of the oldest areas of debate that swirls around cities concerns the appropriate
level of control. Is it advantageous for localities to decide their own destinies, or
should higher levels of government exert considerable control over the public sec-
tor in cities? In highly centralized societies, even national governments can be
involved in very local services and regulations. As prime minister and president
of France, Georges Pompidou was intimately involved with the rebuilding areas of
Paris. In Britain the national government oversees London’s policing and education
systems. The mayor of London’s control is largely limited to transportation policies.
Federalism is much stronger in the U.S., but even there, the federal government
has taken a leading role in funding many examples of urban infrastructure, includ-
ing transportation and public housing; the core powers of city governments are
determined entirely by the state, and many states severely restrict local freedom. In
Massachusetts, for example, local taxing authority is severely limited by the state
legislature; even liquor licenses in Boston are controlled by the General Court of the
Commonwealth of Massachusetts. In California, state referenda impose strong lim-
itations on local governments, such as Proposition 13, which imposes tight limits
on property taxes imposed by local governments. Likewise, in India, states like
Maharashtra and Karnataka exercise enormous power that restricts the ability of
their large cities, like Mumbai and Bangalore, to act on their own.
Just as there is a great deal of variety in the degree of local control, there is great
heterogeneity of opinion about the appropriate level of control. Tiebout’s (1956) is
the most famous article making the case for localism. Tiebout emphasized the ben-
efits of providing a variety of city services, which could cater to the different tastes
of consumers. He also, more briefly, suggested that the ability of citizens to “vote
with their feet” and exit badly performing localities would provide beneficial incen-
tives. Other alleged benefits of local control include the ability of localities to experi-
ment, and Louis Brandeis famously called American states “laboratories of democracy.”
Others have suggested that local control improves the functioning of democracy by
increasing the connection between voters and their elected representatives.
But there are strong arguments against local control as well. Public policy may
benefit from economies of scale. It may be easier to attract high-quality bureaucrats
at higher levels of government. Local control may lead to negative forms of compe-
tition, and some have argued that competition for businesses leads to a “race to the
bottom,” where communities compete by handing out unproductive subsidies. This
force is particularly feared in the area of redistribution, where localities that want
to avoid attracting too many poor people may restrict redistribution in order to
make their communities less attractive to the less wealthy.4
The costs and benefits of local control will also be related to the desirability or not
of sorting. While it is certainly possible for centralized government to provide dif-
ferent levels of services and taxation in different geographic areas, such differences
occur far more naturally when the different areas are controlled by different gov-
ernments. Those differences in taxation and service quality tend to exacerbate the
tendency of people to sort into different geographic areas.
Sometimes this sorting is desirable because it enables governments to specialize
in the services that are appropriate for one element in society. But sorting can also
mean segregation and that may have significant negative consequences. Cutler and
Glaeser (1997) find that there is more racial segregation in metropolitan areas that
contain a larger number of governmental units. Young African Americas have sig-
nificantly worse outcomes in those areas where political fragmentation is more
severe and segregation is higher.
4
Conversely, Glaeser and Shleifer (2005) argue that in some cases local leaders, whose electoral support
comes mostly from the less prosperous, may enact policies that inefficiently encourage the emigration of
wealthier residents.

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What is known about the impacts of local control on the quality of public servic-
es? Hoxby (2000) found that school performance was higher in areas that were split
into more jurisdictions, which seems to support the claims of local control advocates,
although these results have been questioned by Rothstein (2007) and defended by
Hoxby (2007). Inman (2007) looks across countries and finds a positive correlation
between one measure of federalism and output per worker and a negative correla-
tion with corruption. These results are suggestive, but they hardly qualify as the
final word. Evidence badly lags theory in this area.

SHOULD THE GOVERNMENT TAKE AN ACTIVE APPROACH TO SPACE

A final major area of debate is whether the national government (or European
Union) should take an active role managing the distribution of population and eco-
nomic activity within its borders. The most extreme examples of such policies are
internal passports that explicitly restrict migration within a country, which still
limit migration to Moscow and many areas of China. Most democratic regimes
allow migration, but many engage in explicit subsidization of poorer areas.
For example, Italy has long subsidized economic activity in the backward region
of the Mezzogiorno through its tax policy. America had an explicit policy toward
Appalachia, particularly focused on improving transportation. Enterprise Zones in
the UK and Empowerment Zones in the U.S. offer tax breaks to businesses that
locate in poorer neighborhoods. The European Union has a regional policy that
“seeks to reduce structural disparities between EU regions, foster balanced devel-
opment throughout the EU and promote real equal opportunities for all.”5 In other
cases, governments try to create clusters of economic success to take advantage of
local spillovers.
There are typically three rationales for different spatial policies. Barriers to
regional mobility can be justified as a response to negative externalities associated
with population density in certain areas. If every new migrant to Moscow reduces
the quality of life in that city without creating a positive offset in the migrant’s old
community, then there is a case for taxing migration to Moscow. In this case, stan-
dard economic arguments would suggest that an internal passport is inefficient
because it prevents migration even among people who would value living in the city
far more than the city’s current residents.
How big are the negative externalities associated with allowing the growth of
cities? There is a modest literature on this question for the U.S., but far less else-
where. In the U.S., greater urban size and density is associated with more crime
(Glaeser & Sacerdote, 1999), more pollution (Glaeser, 1998; Kahn, 2009), and more
congestion (Glaeser & Gottlieb, 2009). These are all negative consequences of adding
population, and these problems may be more severe in the developing world.
While increases in city population do seem to be associated with some negative
externalities, there are also positive effects of clustering together, both because of
agglomeration effects and because coming together in cities reduces the pollution
and congestion associated with lower-density living. For example, Glaeser and
Kahn (2010) find that carbon emissions per household are typically lower in dense
urban areas than they are in suburban life. To implement a sensible spatial policy
that deters migration because of negative urban externalities would require a great
deal more country-specific information.
It is not that it is known that these externalities are unimportant. But it is not
known how big they are or whether the net external effect of moving people from
one place to another is positive. For even if it were certain that, in general, adding
people to places generated positive (or negative) externalities, moving people from

5 http://europa.eu/legislation_summaries/regional_policy/index_en.htm.

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120 / The Challenge of Urban Policy

one place to another means weighing one effect against the other, and that compar-
ison typically requires understanding place-specific externalities. Given the extent
of this ignorance, it is hard to strongly support spatial policies to correct for gener-
al economies and diseconomies of agglomeration.
A second case for spatial policies emphasizes equity, as the EU’s mission state-
ment explicitly does. Helping poor regions may be an indirect means of helping
poor people, although one can reasonably ask whether spatial policies are all that
efficient at fighting local poverty. Conventional economics would suggest that such
policies could lead to higher property values, but little real gain for workers.
There is some information about the impact of such policies on poorer people.
UK Enterprise Zones and U.S. Empowerment Zones have been seriously studied,
and while the literature is mixed, the most recent and comprehensive work has
found some positive consequences on employment within the effected land area.
For example, Busso, Gregory, and Kline (2010) find significant positive effects of
Empowerment Zones on wages and employment in disadvantaged areas. The rent
effects they estimate are relatively small. These relatively positive results contrast
with Papke (1993), who found that the British Enterprise Zone employment effects
were expensive and primarily involved job relocations. Notably, even given their rel-
atively positive results, Busso, Gregory, and Kline (2010) find that Empowerment
Zones may well create deadweight losses.
A third argument for spatial policies is that they are a response to local external-
ities. If encouraging more businesses creates positive spillovers for the residents of
Appalachia or the Mezzogiorno, then subsidizing those businesses may make sense.
But the existence of externalities is not enough. As spatial policies aim to move peo-
ple or businesses from place A to place B, the externalities from locating in place B
must be greater than the externalities from locating in place A for it to be optimal.
For example, for America’s Appalachia policy to be justified through economic
externalities, it would have to be true that the spillovers from locating in Appalachia
are larger than the spillovers associated with locating somewhere else.
There is a reasonable body of research suggesting the existence of agglomeration
economies. Cross-sectional work typically relies on geography and history for iden-
tification, and finds that greater density is associated with more productivity
(Ciccone & Hall, 1996; Glaeser & Gottlieb, 2009). Greenstone, Hornbeck, and
Moretti (2010) examine the impact of plant openings on neighbors’ productivity
and also conclude that there are significant positive spillovers. However, this work
has not been able to establish that the spillovers are larger in some areas than oth-
ers, which means that policies that shuffle economic activity may have no net pos-
itive effect, even if they benefit some communities.
Spatial policies exist throughout the world that are either explicit or implicit. In
some cases capital cities are favored with public largesse, not because of any well-
thought-out policy, but just because the problems of the capital are more visible to
policymakers (Ades & Glaeser, 1995). Unfortunately, despite the prevalence of these
policies, very little is still known about whether they make sense.

CONCLUSION
Urban policies range from the nuts and bolts of city government to large-scale spa-
tial policies that favor one area or another. A large number of urban policies are jus-
tified as tools for fighting local externalities, such as road building and providing
clean water. The exact right mix of engineering and economics in these areas may
not be known, but it is known that laissez-faire is not the right answer and that both
approaches have had dramatic positive effects. In the area of land use regulation, a
growing body of research suggests that these policies often restrict populations,
increase prices, and may be excessive.

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 The Challenge of Urban Policy / 121

Despite decades of debate, there is less clarity about private provision of city serv-
ices and federalism. In the case of privatization, there are plenty of examples of
both positive and negative results from moving away from public management. In
the case of federalism, there is an abundance of theory and a paucity of compelling
empirical evidence. The state of knowledge on spatial policies is quite limited.
Empowerment Zones have been carefully studied, and while they do produce some
positive effects, the overall welfare effect of these policies may still be negative.
Urban policy is an important topic that touches billions throughout the globe.
While researchers have discovered important facts about these policies, the state of
knowledge is still woefully incomplete. Research has much to add to the policy
debate, but still more to uncover.

EDWARD L. GLAESER is affiliated with both Harvard University and the National
Bureau of Economic Research.

ACKNOWLEDGMENTS
I thank the Taubman Center for State and Local Government for financial support.
Kristina Tobio provided excellent research assistance.

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