Islington is the most densely populated area in the United Kingdom, yet wandering around the quiet streets of the north London borough, it is difficult to appreciate just how many people live there. Handsome terraces, elegant squares and a plethora of parks disguise the fact that there are nearly 14,000 people packed into each square kilometer.

By comparison, anyone passing through Southwark, on the other side of the Thames, is immediately aware of the crowds of people who live and work in the area. New glass towers loom over the major roads while older council housing squat heavily on the back streets. Cars crawl through the famously congested roundabout and the air is heavy with pollution. Yet Southwark has fewer than 10,000 residents per square kilometer, significantly less dense than many of its more desirable northern neighbors, including Kensington, Chelsea, Hackney, Camden, Tower Hamlets and, of course, Islington.

Increasing the number of people living and working in an area can generate huge benefits for a city – if managed well. Productivity rises as people spend less time and money travelling and can share knowledge and ideas more freely. Businesses can reduce production costs when they have access to more suppliers and workers. And it’s cheaper to provide services such as health care, waste collection and transport when more people use them.

But there are also risks. For the first time, researchers have estimated the monetary value of these benefits, finding both positives and negatives for urban residents. Their findings are published in the first working paper from the Coalition for Urban Transitions, a network of more than 20 organizations committed to enhancing the economic, social and environmental performance of cities.

Productivity Gains, Housing Costs

Drawing on more than 300 academic papers, “Demystifying Compact Urban Growth: Evidence from 300 Studies Across the World” demonstrates that increasing population density generates significant economic returns. The authors find that a 10 percent increase in the number of people living and working in an area enhances productivity by approximately $71 per person per year. Better access to jobs is worth another $62, while improved access to services and amenities is valued at $49. Increased population density is also associated with better environmental outcomes, including preservation of green space and greater energy efficiency.

All other things being equal, this suggests that compact cities like Hong Kong, New York and Paris are likely to be richer and more sustainable than sprawling cities such as Houston or Melbourne.

A more compact city is not a silver bullet, however: there are also risks associated with increasing population density. Careful urban planning is required to mitigate these risks, and deliver the potential economic and environmental benefits.

First, a 10 percent increase in the number of people living and working in an area can lead to more congestion, with an estimated cost of $35 per person a year. Significant investment in public transport, cycling lanes and pedestrian walkways is essential to ensure that people can move around the city without cars.

Second, this increase in density increases housing costs by $240 per person per year. Such growth in housing prices might benefit people who own their own homes or rent out property, but it is a challenge for renters. As low-income households are more likely to rent, there is a risk that compact city policies exacerbate inequality.

Governments can avoid an increase in housing costs through policies to increase housing supply. A steady flow of new homes coming on to the market can have a downward effect on housing prices, which may outweigh the upward effect caused by increasing population density.

Lessons from London

In the 19th century, the city of London undertook a series of extraordinarily ambitious urban infrastructure projects that continue to shape the city. The world’s first underground railway was opened in 1863; today, the London Underground carries an average of 5 million passengers per day.

In the 1860s, a vast network of sewers and drains were constructed to serve the 3 million people living in London. These pipes ended the waves of dysentery, typhoid and cholera that devastated the city, and continue to be used by more than 8 million Londoners. These far-sighted investments enabled people to live and work in close proximity to each other, helping to sustain the city’s population and economic growth for more than a century.

A walk through London today suggests it is now struggling to manage population density. Despite the new Crossrail railway expansion and the proliferation of cycling lanes and iconic red buses on every street, many people continue to depend on cars. As a result, London has the worst air pollution in Western Europe. A normal day’s exposure is equivalent to smoking 15 cigarettes.

The problems extend from transport to housing. House prices in Islington have doubled in the last decade, a period when real wages stagnated. The soaring property prices are the favorite topic of struggling renters or prospective buyers. The city needs to build more than 50,000 homes a year to keep up with population growth, while redressing decades of neglect in the existing housing stock. The failures of London’s housing policy were made all too clear with the shocking fire that devastated Grenfell Tower and the lives of its residents.

Thousands of people move to London every year for the economic and social opportunities associated with this extraordinary city. Its dynamism is due in no small part to its high population density. However, the city’s strained transport system and spiraling house prices underscore the importance of strategic government intervention to manage the risks of crowding so many people into such a small area. Large-scale investment in public transport and housing are essential to ensure that compact cities are also livable and affordable.

This original version of this article was published in CityMetric.

Sarah Colenbrander is a researcher with the London-based International Institute for Environment and Development and senior economist with the Coalition for Urban Transitions. The working paper, “Demystifying Compact Urban Growth: Evidence from 300 Studies Across the World,” was prepared for the Coalition for Urban Transitions by the Organization for Economic Cooperation and Development.