This paper considers the worthwhileness of massive residential construction in urban renewal programs in metropolitan centers (cores), as opposed to establishing new neighborhoods on the outskirts of cities in the middle or outer rings (suburbanization) of Gush Dan.

In Israel, particularly in the Tel Aviv area, due to the lack of open space, the main alternative for increasing the supply of housing in the metropolitan area is through urban renewal programs.  Adopting such programs on a large scale in the center of Gush Dan will require a massive change to the existing urban fabric, and will involve urban densification as well as costs during the transition period. These will include direct costs such as the cost of infrastructure construction and the adaptation of existing infrastructure to the increased density, as well as indirect costs that result from prolonged construction, such as negative impacts to residents and businesses, slower vehicular traffic, and a temporary decline in the supply of housing.  Despite the high costs involved in such densification, this paper finds that the benefits are greater.

The analysis is based on a wide variety of studies in the relevant fields, as well as on available empirical data.  The results show that the current value of the net benefit (benefit minus cost) of urban renewal in the center of Tel Aviv for 40,000 dwellings is about  NIS 12.8 billion higher than suburbanization alternative (about NIS 320,000 per dwelling).  The most significant benefit is the agglomeration effect: the positive effect of densification on wages and productivity, where the main beneficiaries of this effect are employees and employers (firm owners) in the metropolitan center.  Beyond that, all individuals in the economy are expected to benefit from agglomeration profits, since the higher wages will lead to higher income tax receipts and higher profits will lead to higher corporate tax receipts.  Homeowners in vacate-and-build projects (in the metropolitan center) benefit from increased value of their dwellings, while the economy bears the cost of allocating means of production for their construction. 

Alongside the benefits, there are also costs, most of which will be borne by area residents, business owners, and employees in the metropolitan center.

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