Land Use Policy Economics 312 Martin Farnham
Government Intervention in Land Use We ve shown that markets will allocate land to the highest bidder. This suggests land will go to where its private use value is greatest Whoever can make greatest profit (or utility gain) from using a piece land will offer highest rent, and thus get the land However private use value may differ from social use value 1
Government Intervention-- Externalities Land use may incur positive or negative externalities on neighbors Consider a loud manufacturing process (neg ext) Manufacturer may want to locate in a suburb that has many potential employees May be willing to pay more for land in that suburb than residential users are willing to pay But its manufacturing process may keep residential neighbors awake at night Firm doesn t take into account external cost of its land use on neighbors; arguably social value of its land use is less than the private value; could be that social value of land is greater in residential use than in manufacturing use 2
Government Intervention-- Externalities Goal of social planner should be to put land to use where its social value is highest In this case, the city might intervene where markets fail to allocate land according to greatest social value How can government intervene to solve externalities problems? Command and control (e.g. zoning and other landuse restrictions) Taxes and subsidies 3
Govt Intervention: Command and Control Government can control externalities by forcing or prohibiting certain behaviours Can ban noise between 9pm and 8am Can prohibit smokestack pollution in residential neighborhoods Can force people to maintain their yards Advantages: Easy policies to implement Disadvantages: Command and control tends to be inflexible and therefore inefficient. 4
Govt Intervention: Taxes and Subsidies Policy can be used to internalize an externality For negative externality, a tax equal to the marginal external cost can force the agent to act as if they cared about the externality e.g. tolls on roads Same can be done for positive externalities. e.g. subsidies for painting houses (because spillovers benefit neighbours) 5
Govt Intervention: Taxes and Subsidies Problems with taxes and subsidies Typically require larger government bureaucracy to oversee than command and control (C&C) policies do Like with C&C, if government taxes or subsidizes too much or too little, won t bring about efficiency Advantage: By pricing and letting market decide, these policies give individuals flexibility on how much or little they change their behaviour Suppose I get no benefit personally from having my house painted. It would be inefficient to force me to paint it. Subsidy lets those who benefit most from painting do it, but leaves others alone. 6
Govt Intervention Economists prefer the tax-subsidy approach (in theory), but cities generally pursue the C&C approach In some cases Pigouvian (designed to control externalities) taxes and subsidies are applied Hartland Landfill charges for dumping yard waste, but not for dumping household chemicals even though they are surely more expensive to dispose of. Why? Houses in Victoria with heritage status receive significant subsidies for painting and maintenance/repair of external trim. Why? Zoning, noise restrictions (as opposed to a decibel tax), leash laws (as opposed to taxing the fear caused by a dog running loose), snow removal rules (as opposed to a shoveling subsidy), etc. are easier to implement in practice 7
Govt. Intervention--Zoning Zoning is the main form of C&C land-use policy used by cities Think back to our loud manufacturer City could impose a decibel (noise) tax Could ban noise at certain hours Or could just ban noisy businesses from residential neighborhoods (zoning) Can deal with various negative externalities through zoning 8
Govt. Intervention--Zoning Positive externalities may also be an issue with zoning Firms only take localization economies into account insofar as such externalities benefit them A firm doesn t take into account its benefit to other firms by clustering (only the benefit to itself) Hence firms may cluster too little from the social planner s perspective Zoning in ways that encourages firms to cluster may increase social welfare City planners may take such positive externalities into account in picking zoning rules 9
Design Zoning City planners may have a vision for how the city is laid out May want to encourage certain land use in certain parts of the city; promote open space in other areas Zoning can help to achieve this goal Directed development (e.g. designate some areas for high density development, others for open space) See http://www.victoria.ca/en/main/departments/ planning-development/community-planning/ downtown-plan/view.html for proposed downtown development plans for Victoria 10
Green-Space Zoning Cities may zone areas for scenic preservation Zoning is cheap for city; it passes most of the cost onto the landowner whose land is suddenly useless (or less useful) for the owner. If city bore full cost of providing open space (by purchasing the land) it would likely create less open space Zoning for open space is likely to be inefficient (because MC (to city) of providing open space to city is essentially zero) 11
Can Cities Survive Without Zoning? Depends how well we think private parties can manage the externality problem Coase Theorem (from public economics) says that externalities can be managed by assigning property rights and letting affected parties negotiate (i.e. no need for govt interference) e.g. Neighbors could form coalition to outbid a noisy manufacturer for nearby land; or they could allow the manufacturer to enter on condition that it agreed to implement noise-limiting practices (or paid them compensation) Many people feel Coase Theorem only applies under ideal circumstances (when externalities affect many people, it becomes untenable to bring 12 them together to negotiate together)
Can Cities Survive Without Zoning? Houston, TX is a city without zoning. Glaeser discusses how cheap Houston is by comparison to other big US cities Makes it an attractive place for business to locate Local neighborhood covenant agreements manage local externalities An application of the Coase Theorem Industry tends to cluster together without being told to do so (probably due to localization economies) However, many would claim that Houston is far from an ideal city (major pollution, sprawl) 13
Other Land-Use Restrictions Building codes ensure safe structures Arguably consumer protection; though may profit developers, may help exclude poor Design controls Prevent ugly buildings from being built Noise restrictions Parking requirements for new condos Exclusionary zoning (zoning out the poor, to keep tax burden on current residents down) Inclusionary zoning (zoning for low-income housing--victoria does some of this) Historic preservation (limits ability to tear down old buildings) 14
Other Land-Use Restrictions BC s agricultural land reserve The economic argument for the ALR is that farmland carries a positive externality Bucolic scenes are generally valued by people above views of tract housing Some would argue a more flexible ALR (with tradeable development rights) would be more efficient. 15
Urban Growth Boundaries If city wants to discourage sprawl, can use urban growth boundaries to limit growth of fringe development Urban growth boundary Can simply draw line around area of the city to which growth will be limited Forbid development outside this area Portland, Oregon is prime example of using this policy Urban service boundary Cities can refuse to extend sewer lines, school district service, or roads beyond certain boundary Boulder, Colorado has done this with some success Note that population is not explicitly limited, just where it can locate is limited. 16
Urban Growth Boundaries City imposes boundary (but doesn t fix lot sizes) Value of residential land outside boundary falls More people compete for land inside boundary More people bidding for same land==>factor substitution and consumer substitution ==>higher overall willingness to pay per acre. Overall BR curve rises (within boundary) Note winners and losers Landowners inside boundary win, outside lose Urban Growth Boundary BR ($) Business/ Residential Boundary Agric 17
Problems with Growth Limits Remember, city policymakers only have jurisdiction over their city (can only manage externalities within your own border not those that spill over borders) Outside jurisdictions (e.g. suburbs) may not cooperate with city Example: Boulder, CO implemented urban service boundary to restrict suburban sprawl Nearby city of Superior, CO has grown (and sprawled) dramatically; Boulder has no control over this One way to deal with this is to form regional federations of cities and towns to coordinate regional development policies 18
Problems with Growth Limits Victoria, BC provides an example CRD is a loose federation of Victoria and neighboring towns (Oak Bay, Saanich, Esquimalt, Sidney, Langford, Metchosin, etc.) Together they try to coordinate policy to deal with externalities related to land use Preservation of open space (green space, blue space) Preservation of farmland Focused development to limit sprawl Transportation strategy Another way to deal with this is to call on provincial or federal intervention to manage issues such as suburban sprawl 19
Building Permits as means to Limit Growth Victoria is appealing to many people because it s got open space and low congestion City could preserve these amenities (limit growth) by limiting permits for new buildings or renovations that divide units A binding limit on permits is essentially a quota Restricts supply, driving up price of housing and limiting growth of housing stock 20
Building Permits to Limit Growth Limiting permits restricts number of units, raises housing price Also lowers land use and hence land rents MC of last house is lower with quota due to land price decrease Effect of Limiting Building Permits on Market for new homes Price P P S (w/quota) Permit limit S D Q Q # units/yr 21
Building Permit Allocation Mechanisms Note that city could auction building permits Developers should be willing to pay difference between the price and MC of new unit City could issue permits by lottery This gives rents from permits to developers Corruption could play role (with permits issued according to bribes to politicians) City could also use permit system to approve projects that serve other city objectives Victoria wants to promote high-density housing They could issue permits on the basis of whether the project is high density 22
What Would Glaeser have to Say About this? Does his argument about building restrictions ignore anything? Would this policy be sensible to pursue on a Canada-wide basis? Is it optimal from a provincial point of view? 23
Fringe Land Use New development tends to occur at city edges, where extending infrastructure may be particularly expensive Cost of extending roads, sewer, may exceed the new property tax revenues generated by new development Cities, therefore, may want to limit such development 24
Fiscal Burden of Fringe Land Use Ways to address fringe development problems Zone fringes for agricultural use; set huge lot minimums Impose tax surcharges on new development (to make sure development pays for infrastructure expansion) Impose one-time development charges (impact fees) Those fees will be passed onto homebuyers and landowners 25
Fiscal Burdens of Commercial and Industrial Development Expanding office space in a city may create congestion, require widening of roads, etc. City may assess impact fees on developers of office and commercial space San Francisco has zoned to limit office building heights (effectively limits supply of office space) In West LA, developers pay impact fee of $2000 per rush-hour trip generated by new office space Money goes to road widening projects This is much more sensible than the SF policy. Though pricing roads appropriately would be better policy. 26
Other Approaches to Managing Externalities Some US cities try to keep elderly from moving to suburbs by offering free community college courses; medical services Marketing to attract desirable inhabitants Michigan Cool Cities program tried to pitch cities as good places for artists, creative class to live, in hopes of revitalizing cities through in-migration Neighborhood organizations informally manage externalities by organizing protests against nuisance developments, etc. NIMBYism doesn t necessarily correct externalities but may just shift them around 27
Capital Regional District Growth Strategy https://www.crd.bc.ca/project/regional-growthstrategy Shows general plan for Victoria and surrounding communities through 2026 Integrates development, transportation, affordable housing plans Tries to combat sprawl and congestion Involves agreements between local municipalities 28
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CRD Growth Strategy Highlights some Issues The actions of one community spill onto others--so it makes sense for communities to tackle these issues in a coordinated way Managing sprawl involves issues beyond just land use Transportation Availability of affordable housing (i.e. unintended consequences, such as increased housing prices must be addressed) Effective policy requires enforcement ability-- not clear that CRD has this ability 30
Important to Remember Land Use Controls Impose Costs It s easy for planners to impose restrictions with the stroke of a pen Important to fully consider costs of policy Restrictions on growth make cities more expensive (hurts poor, non-residents, business) Consider Glaeser discussion of historic preservation in Paris (and other places) Urban planners should consider overall social welfare not just benefits of a given 31 policy.