Agglomeration economies, diseconomies, and city size: the case of Australian cities

This thesis examines the interplay between urban economies and diseconomies in Australian cities, and their relationship with productivity-maximising city size.Economic theory postulates the existence of an inverted U-shaped relationship between output per worker (productivity) and city size. Using the Au and Henderson (2005) (AH) model, we analyse this relationship for Australia. Given that the theoretical AH model imposes a monocentric circular urban structure, this thesis proposes a generalisation of the model that allows for non-circular polycentric urban structure. From a theoretical point of view, this extension illustrates the importance of transport efficiency, and housing affordability in improving urban-productivity outcomes. Empirical results suggest that the generalised version of the AH model is supported by the data. In addition, we find that the classic Marshallian scale effect is dominant in Australian cities. It is argued that this is because the knowledge economy (services sector) plays an important role in an advanced economy such as Australia. Empirical results are also used to estimate productivity-maximising city sizes for Australian Statistical Area 3 (SA3) cities. This shows that though the vast majority of Australian SA3s are operating below their productivity-maximising peak sizes, the output loss due to lack of scale is moderate for major SA3s. However, of the major CBDs in Australia, output loss is more than 20% for North Canberra, Brisbane Inner-North and Adelaide City.