If I'm understanding Alexander's argument, he believes that a denser population itself makes a city even more desirable to live in. To me, that sounds like a positive externality, which strengthens the argument for policies which encourage more housing in dense areas. Is that a sensible way of thinking about agglomeration, or is that already "baked in" to the upwards sloping demand curve you drew?
I think this argument is unnecessarily complicated. A denser Oakland with the better amenities Scott assumes--greater consumption variety, more walkable layout, agglomeration effects on productivity--is not the same good as it was prior to the density. Improving the quality of the good mid-discussion is not ceteris paribus, which is a crucial assumption for the partial equilibrium analysis most are doing when they discuss more supply leads to lower prices. Of course there could be general equilibrium affects that *appear* to raise the price of the same good, but that is caused by secondary effects that feedback into the initial analysis, some of which can even change the good in question (as with neighborhoods). A denser Oakland is a different Oakland (if amenities increase as Scott assumes), just like an iphone 14 is not the original iphone. No upward sloping demand curves are needed to explain any of this.
I don't think upward-sloping demand is the argument he is making. Rather, the way I interpret him is that increased density will cause a shift of the D curve to a D' curve, and that the intersection of D' and S' will be at a higher price than that between D and S. This would imply that the price would initially drop (to the intersection of S' and D) after an increase in supply, but once increased density had shifted the demand curve, the original price would be surpassed.
To wade in on the impact of which effect dominates - this is from our discussion of housing:
"Anagol, Ferreira and Rexer (2023) looked at recent zoning reform in Sao Paulo, Brazil. Sao Paulo is the 4th largest metropolitan area in the world with a population of 21mln. A reform in 2016 allowed for a larger building density on each block – on average, this allowed for a 36% increase in building construction on a given lot. The authors found that this reform increased housing supply by about 1.9% and reduced home prices by 0.5% in Sao Paulo."
So densfication had limited impacts on prices. I think what's most important to look at regarding housing affordability solutions is actually how does welfare change. Once we start looking at welfare changes, it is understandable why upzoning will face significant political push back.
One interesting thing about Scott's argument (which I didn't notice initially) is that the plots of housing cost vs density actually normalize housing cost by income. This is curious because income increases with higher density because of agglomeration effects. If the argument is that agglomeration effects explain why higher density leads to higher housing costs, then I think you have to be claiming that agglomeration effects are stronger for housing cost than for income.
Which, I guess, is possible.
But a much simpler explanation seems to be that there's an interaction between housing regulation and density/growth. If your city isn't dense and it's not growing, then it doesn't really matter if all you can build is single-family homes, and housing would still be cheap. But if you're dense and growing *and* you can't build, then your price would be going up a lot.
The Los Angeles urbanized area has been America's densest for years. But this is an average density for a large area. The point is that all the densities being discussed are averages. And they are misleading.
If I'm understanding Alexander's argument, he believes that a denser population itself makes a city even more desirable to live in. To me, that sounds like a positive externality, which strengthens the argument for policies which encourage more housing in dense areas. Is that a sensible way of thinking about agglomeration, or is that already "baked in" to the upwards sloping demand curve you drew?
I think this argument is unnecessarily complicated. A denser Oakland with the better amenities Scott assumes--greater consumption variety, more walkable layout, agglomeration effects on productivity--is not the same good as it was prior to the density. Improving the quality of the good mid-discussion is not ceteris paribus, which is a crucial assumption for the partial equilibrium analysis most are doing when they discuss more supply leads to lower prices. Of course there could be general equilibrium affects that *appear* to raise the price of the same good, but that is caused by secondary effects that feedback into the initial analysis, some of which can even change the good in question (as with neighborhoods). A denser Oakland is a different Oakland (if amenities increase as Scott assumes), just like an iphone 14 is not the original iphone. No upward sloping demand curves are needed to explain any of this.
I don't think upward-sloping demand is the argument he is making. Rather, the way I interpret him is that increased density will cause a shift of the D curve to a D' curve, and that the intersection of D' and S' will be at a higher price than that between D and S. This would imply that the price would initially drop (to the intersection of S' and D) after an increase in supply, but once increased density had shifted the demand curve, the original price would be surpassed.
To wade in on the impact of which effect dominates - this is from our discussion of housing:
"Anagol, Ferreira and Rexer (2023) looked at recent zoning reform in Sao Paulo, Brazil. Sao Paulo is the 4th largest metropolitan area in the world with a population of 21mln. A reform in 2016 allowed for a larger building density on each block – on average, this allowed for a 36% increase in building construction on a given lot. The authors found that this reform increased housing supply by about 1.9% and reduced home prices by 0.5% in Sao Paulo."
So densfication had limited impacts on prices. I think what's most important to look at regarding housing affordability solutions is actually how does welfare change. Once we start looking at welfare changes, it is understandable why upzoning will face significant political push back.
One interesting thing about Scott's argument (which I didn't notice initially) is that the plots of housing cost vs density actually normalize housing cost by income. This is curious because income increases with higher density because of agglomeration effects. If the argument is that agglomeration effects explain why higher density leads to higher housing costs, then I think you have to be claiming that agglomeration effects are stronger for housing cost than for income.
Which, I guess, is possible.
But a much simpler explanation seems to be that there's an interaction between housing regulation and density/growth. If your city isn't dense and it's not growing, then it doesn't really matter if all you can build is single-family homes, and housing would still be cheap. But if you're dense and growing *and* you can't build, then your price would be going up a lot.
The Los Angeles urbanized area has been America's densest for years. But this is an average density for a large area. The point is that all the densities being discussed are averages. And they are misleading.