Zoning and Externalities

updated March 5 with Case 0

Ryan Avent (among others) comments on Ed Glaeser’s piece on Skyscrapers: Density and Skyscrapers and seems to support allowing more high density development in cities, which are restricted by local government regulation.

The issue that does not really come out (though is mentioned in the comments) is the problem of zoning vs. externalities. The reasons for the lower zoning densities are many, but the rationale is externalities (and the desire to move nuisance law from courts to regulation to avoid the large transaction costs and uncertainties of the judicial system). If you increase density, as the neighbors know, you increase local externalities which they bear (through longer travel times, etc.).

Since no one owns the right to uncongested roads, developers (and planners who support them in their quest for the highest and best use) think they can just offload these costs to local neighborhood streets and it is okay. But what they do is take time from other people by increasing congestion. The neighbors think (presumably by custom, status quo, or some other logic) that they have the right to prevent these externalities, and they do so with restrictive zoning. Zoning regulates negative externalities that are not currently governed by Pigou or Coase.

Neither side is right, the problem at its core is undefined property rights and untolled roads. It is just two sides of selfishness: greedy developers vs. greedy NIMBYs.

I had a similar conversation with Jonathan Levine at the November Regional Science Conference. He asked if a developer could come and build a high-rise in an existing single-family residential area. I replied “good luck”, suggesting the NIMBY’s hold the cards. I also suggested this was a relatively rare case, which I think is because the zoning largely reflects the market in most places. I.e. there is not much market for high rise housing in largely single-family neighborhoods. There are of course edge cases. Systematically, there are three four cases when a developer is considering building somewhere:

(0) The zoning is not binding. In this case the zoning exceeds market demand, but there are negative externalities to development which the neighbors want to avoid.

(1) The zoning is not binding. In this case the zoning exceeds market demand, but the negative externalities are small.

(2) The zoning is binding, but the developer through either request or lobbying (perhaps at some monetary expense) gets an area rezoned. The lobbying allows political decision-makers to collect rents from restrictive zoning, or neighbors to achieve side-payments. These side-payments compensate the community for the negative externalities that will be received upon a change in the status quo. The political rents are a problem for the political system and how we finance campaigns or administer bribery laws.

(3) The zoning remains binding, but the land is not rezoned because the developer’s payments were, or would be, insufficient to persuade the opponents or decision-makers.

Case 0 is a problem for the community, which must now pay the developer not to develop. We see this when communities purchase development rights (e.g. agricultural reserve areas). Here the Coasian right to develop resides with the developer One can see difficulties with Case 0 scenarios. Developers can threaten to develop, and get paid not to develop, even though they were not serious. Bluffing is very easy. Hence the desire for communities to control the development rights through restrictive zoning. Residents must act through government because of the asymmetry and coordination costs, 1000 neighbors all harmed slightly do not have the ability or incentive individually to give a side payment to a developer not to develop at all (or as much), because some residents will want to free-ride on the side payments of others. Only through the government or government-like organization can this be achieved.

Case 1 is not a problem for developers or the community, and the development proceeds without hitch.

Case 2 costs the developers money, but in the end if they choose to build, it still must generate above “normal profits”, otherwise it would be better for the developer to keep their money in a bank account. This results in a transfer of money, but is at least neutral and probably win-win.

Case 3 might result in some social loss (especially if there are, in fact, economies of agglomeration), but what is happening is that the loss perceived by the opponents outweighs the benefits perceived by the developer. There may be of course miscalculations about the opponents willingness to pay or willingness to accept, but in the end the potential gains did not outweigh the potential losses, and the project may not have been as good as claimed.

Whether the zoning reflects the wishes of developers or neighbors depends on context, and as density increases, we would expect the neighbors to become relatively more powerful, if only because the negative externalities of development become apparent to more and more people.

As I implied above, there is not a moral right in retaining the status quo, but from a Coasian perspective, zoning creates the property right in a given level of externalities which rezoning proposes to change. There should still be an approximately efficient outcome in the end, if not for political rent-seeking.

3 thoughts on “Zoning and Externalities

  1. There are many points you bring up worth discussing, but my son is watching a TV show that is 23 minutes long and that’s all the time I have. Based on some work I am doing regarding parking requirements in NYC right now, I argue that most NYC development is between 2 and 3. A couple of points about skyscrapers that is worth noting: 1) most NYC residential development is not particularly tall. The Paris-NYC comparison overstates NYC residential construction vertically. Certainly there are many tall buildings, but most of Manhattan and almost all of DT Brooklyn is of much fewer stories than suggested by Avent or Glaeser. Here is a NYTimes piece about how few apartments exist at 60 floors, for instance: http://www.nytimes.com/2010/07/04/realestate/04deal1.htm There are residential skyscrapers, but in an older definition of what a skyscraper is.
    2) Almost all new large construction in NYC has community benefit agreements attached, so the rent seeking is institutionalized. For instance, Columbia will give the local economic development corp. $76 million so the school can build the Manhattanville campus, which will replace empty warehouses and mini-storage. The rent seeking is an enormous issue that is poorly understood. The fact that anything gets built in NYC is testament to Coasian bargains in action.


  2. I think the cost of the externalities gets wiped away by the increase in tax base — or at least it should if taxes are structured in the right way. Double the density of a block, and the amount of money flowing there should roughly double. It’s not that hard to accomplish considering the typical densities we have today. I’m among the camp that believes we don’t need Glaeser’s skyscrapers. I really advocate for redeveloping land in the city using small 2- and 3-story apartment buildings on small lots most of the time, scaling up to larger mid-rise structures in transit nodes and corridors and near CBDs. The occasional skyscraper wouldn’t hurt, but I don’t see them as the big solution that Glaeser does. And of course, there isn’t any need to plop a skyscraper in the middle of a neighborhood of single-family homes — we’ve tried that before with various HUD projects, and it largely failed.
    The big problem I see is that outward growth remains very unconstrained. Cheap land out on the fringes is just too easy to get. Cities and MSAs should all be setting urban boundaries and adhering to them quite strictly. Zoning needs to get changed so businesses will locate into central business districts — In many cases, these would be brand new because lots of towns and suburbs don’t have them anymore, watching their business districts get unrolled along highway frontage roads instead.
    If traffic is a concern, then design places with walking as the top priority instead. I doubt traffic really is as big of a problem as it is made out to be since a lot — maybe most — of our existing infrastructure is underutilized. Roads, sidewalks, water mains, sewers, electrical grids, and the occasional transit line are all running below capacity aside from some major thoroughfares and centralized services. I find it hard to believe that congestion and nuisance issues can really counterbalance the life-cycle costs of continuing to expand those networks. When expansion does occur, it should usually just be to repair fractured street grids by improving interconnectivity. For people who really can’t live without their cul-de-sacs, perhaps they wouldn’t mind adding new sidewalks or bikeways instead of roads. “Desire paths” abound in most locales, marking the shortcuts people use when road and sidewalk networks aren’t sufficient. Those dirt paths should be paved and made official.
    There are many suburbs without any “center” to them. Tell me, where is downtown Roseville? There are vast numbers of businesses there, but most of them aren’t very well-connected to nearby neighborhoods (if there are any neighbors nearby at all). Zoning should be used to create those missing downtowns, mix people and businesses together more effectively, and reinforce the ability to stay in town and reduce the length and number of car trips.
    Issues of privacy and noise can be addressed through appropriate design and construction. It can often be good to have more eyeballs on the street, reducing the potential for crime to go unnoticed. Buildings themselves should of course be built to be as attractive as possible while reflecting the community they represent, in order to avoid becoming out-of-place eyesores as soon as they are finished. Multi-unit housing should really go onto some of the highest-value land around — dividing the cost of the expensive land among many. The common practice of dumping apartments and condos onto low-value leftovers in the armpits of highway interchanges and other undesirable areas should be heavily discouraged — not just because of the horrible negative psychological impacts on residents from noise and isolation, but also because such locations are often much more car-dependent and would therefore have a much greater impact on traffic congestion than more centrally-located sites.
    Traffic does go up as density increases, but there are threshold points where the local population goes up enough to support local businesses within walking distance, resulting in fewer car trips per person.
    The prediction is that the U.S. is going to add 100 million people in the next 30 or 40 years. That sure sounds scary, but in reality that’s just adding 33%. This country has wasted vast amounts of land in mostly-empty parking lots. We could recover enough land to build that extra 33% simply by doing “grayfield” redevelopment.
    Of course, in some places, a 33% increase in population actually isn’t enough to make a place financially sustainable. I’m not quite sure what to do about such locations, but they should probably follow the same model of doing central infill. Of course, some people really do want large lots and to use their cars all the time, so I don’t have any objection to just letting them be in many cases.


  3. Mulad says: “I think the cost of the externalities gets wiped away by the increase in tax base — or at least it should if taxes are structured in the right way.”
    Agreed, This is the idea of Pigouvian Tax, which I support, but alas does not exist. Property rights (the Coasian solution) is another approach. The second-best solution (see Theory of the Second Best), which we have, is regulatory zoning (and other regulations as pointed out by David King).
    Regarding regional growth controls, there is a Municipal Urban Service Area (MUSA) in the Twin Cities, which is weak. A better solution would be to charge all development its full social cost, which would discourage suburban development the right amount. (Again a Pigouvian solution).
    I do think good design can help, and bestows positive externalities on its neighbors, and this can be achieved to some extent with well-thought out regulation. I am dubious of the ability of government planners to implement well-thought regulations on design though. There are certainly some good examples, but so many bad examples that the problem is structural.


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