The Long-Run Effect of Economic Development Policy on Resident Welfare in a Perfectly Competitive Urban Economy

This paper argues that evaluations of economic development policy must consider the long-run effect on resident welfare. The paper uses comparative static analysis of a closed, urban economy with an explicit labor market, to investigate the effect of policies that stimulate economic activity. The paper finds that such policies do not necessarily raise resident welfare, because of the competition for land between firms and households. On the other hand, the paper does find that income transfers increase resident welfare. This model assumes, however, that the land, capital, and labor markets are perfectly competitive. Therefore, these results are based on the assumption that an urban economy is efficient.