Abstract: Paper No. 164

Economic Development Policy and Resident Welfare: An Urban Economic Perspective

Stephen L. Ross

October 1993

Amid the policies to mitigate the concentration of poverty and unemployment in America's central cities, recent attention has focused on programs that attempt to eliminate central city poverty through urban economic growth and revitalization. Enterprise zones offering tax breaks and other incentives to induce firms to locate new activity or expand old activity in declining areas have become quite popular. For the most part their success has been evaluated in terms of job creation and capital expenditures. The author argues that the persistence of urban poverty and decline dictates that any complete evaluation of those policies must consider long-run effects. Accordingly, general equilibrium models of urban areas should be helpful in examining the effect of economic development policy on the welfare of central city residents.

The author employs a static urban analysis to examine the long-run effects of policies that encourage additional firm activity in an individual urban area. Specifically, his paper asks: In the long-run equilibrium do policies that stimulate economic activity within an urban area unambiguously result in higher welfare for residents? His model is especially suited for this analysis because it examines a long-run equilibrium in which resident's welfare is determined by joint outcomes in labor and housing markets, and the incidence of exogenous shocks to the urban area fall only partially on urban residents. The author shows that the comparative static results for his model are surprisingly different from those of previous research. He concludes that enterprise zones, and similar policies, do not necessarily result in long-run increases in welfare for urban residents because of competition for land between firms and households. The author contends that resolution of this issue must come from empirical research. He argues that it depends fundamentally on firms' demand for land and the demand for land for alternative uses.

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