Key message 2 – Urban land-use: Urban land is a scarce resource, and must be used efficiently

High productivity, if achieved, will translate into high wages. But set against this, urban households – even in a well-functioning city – face a particular set of costs. The first of these arises from the fundamental trade-off of urban economics. Productivity requires density, so that people and jobs are close to each other. But greater density implies, other things equal, that living space is expensive and that each person has less of it. This clashes with the fact that living space is a key ingredient of wellbeing. This trade-off can be shifted in two ways – by enlarging the effective area of the city, and by using the existing area efficiently. The former can be achieved by good transport infrastructure, enabling people to travel to jobs and the development of business links across a wider area. We discuss this further in the next section. The latter requires that land is used efficiently, i.e. that it is put to its highest value use (taking into account amenity and social values, as well as private returns). The pattern of land-use shapes the construction of an efficient city, and the location and quality of the business and residential investments necessary for productivity and liveability.

Efficient urban land-use typically involves a pattern in which businesses, particularly those in sectors prone to agglomeration, cluster together, many of them occupying a central business district. Land prices are high in this area, so other businesses may be more dispersed or located at the city edge, and larger cities may contain several major business districts. Residential areas surround the business districts, with land prices generally declining with distance. High rent residential areas near the centre are high density – achieved through a combination of building height and relatively low floor space per inhabitant.

This configuration makes the best use of available land. Businesses get the benefits of density, and workers can get to centres of employment. High land and property prices induce people (occupants and property developers) to use land efficiently. Efficiently operating land markets are central in achieving this allocation, although markets alone are not sufficient; they must operate in an appropriate institutional and policy environment.