A dynamic model of urban land use with externalities

A dynamic model of the urban land and building market is proposed which explicitly incorporates endogenous spatial externalities. Using stochastic optimization the model estimates for each period first the supply of building space and then the spatial allocation of activities. Prices for buildings and land are endogenous. The development of the urban area depends on the demand for labor in basic industries. The dynamics of the system is controlled also by the lagged response to endogenous variables. Thus, both the level of externalities, which affect the allocation of activities, and rents, which influence the location of the building supply, are based on the results of the preceding period.