MARKETS AND EFFICIENT RESOURCE ALLOCATION IN URBAN AREAS

Summary The purpose of the paper is to put forward a model in which it is possible to analyze the efficiency of market resource allocation in urban areas. The model is a linear programming formulation in which the various activities by which goods can be produced are interpreted to represent production with different land intensities, or buildings of different heights. The urban area produces predetermined amounts of a finite number of goods to be exported from the urban area, and housing for the urban area's workers. The model determines the optimum location of production of each unit of each export good and of housing in the urban area. It also determines the optimum amounts of resources to be devoted to the urban area's transportation system and the optimum amount of congestion. The paper concludes by a demonstration that correct pricing of the transportation system is the key to efficient resource allocation by markets and it provides a measure of the loss of welfare from improper pricing of transportation facilities.