Paper of the Day

Available here. This is the abstract:

This paper suggests a cause of low density in urban development or urban sprawl that has not been given much attention in the literature. There have been a number of arguments put forward for market failures that may account for urban sprawl, including incomplete pricing of infrstructure, environmental externalities, and unpriced congestion. The problem analyzed here is that urban growth creates benefits for an entire urban area, but the costs of growth are borne by individual neighborhoods. An externality problem arises because existing residents perceive the costs associated with the new residents locating in their neighborhoods, but not the full benefits of new entrants which accrue to the city as a whole. The result is that existing residents have an incentive to block new residents to their neighborhoods, resulting in cities that are less dense than is optimal, or too sprawling. The paper models several different types of urban growth, and examines the optimal and local choice outcomes under each type. In the first model, population growth is endogenous and the physical limits of the city are fixed. The second model examines the case in which population growth in the region is given, but the city boundary is allowed to vary. We show that in both cases the city will tend to be larger and less dense than is optimal. In each, we examine the sensitivity of the model to the number of neighborhoods and to the size of infrastructure and transportation costs. Finally, we examine optimal subsidies and see how they compare to current policies such as impact fees on new development.

Here are a few words about optimal subsidies:

There are several interesting implications of the optimal tax in City 1. First, if there is only one
neighborhood, then optimal decisions get made for the whole city, and there is no need for a subsidy. Second, the larger the number of neighborhoods, then the larger the subsidy…must be. If there are a large number of jurisdictions able to make their own decisions about development density, then the private market outcome is likely to be farther from the optimum, and any subsidy will have to be larger. However, even with large numbers of neighborhoods, it is possible to offer a subsidy to the neighborhoods that will make each better off.

One of the interesting things about development decisions is that community outreach and discussion is often focused at a very local level. Hearings are held in the neighborhood, only the local ANCs (here in DC) are asked to weigh in, and the local Councilmember is given particular deference in forming a decision to approve or deny or amend a development plan. But this strategy makes life much easier for NIMBYs than would a decision process oriented at the city-wide level.

Yglesias often argues that one way to address local residents opposing development because they’re worried about, say, parking, is to simply guarantee those residents parking — say that they can have on-street parking permits which won’t be offered to new residents. That sounds like it would provide an unfair windfall benefit to existing residents, but if one simply considers that to be a part of the subsidy, it actually seems like it’s the economically efficient thing to do.


  1. OGT says:

    I think the paper is brilliant, mostly because it confirms my own experiences and biases!

    Having watched the development process in action, or inaction, a number of times, resident’s opposing development consistently cite utility and desirability costs that they fear would be imposed on them, such as traffic, noise, litter, parking, blocked view sheds, etc. Sometimes these fears are more legitimate than others, but they’re presence is pretty consistent.

    Just doing a better job of aligning the revenure incidence and expenditure incedence for new residents could go along way to improving efficiency. For example, most city gov’ts are capable of doing the basic calculations of tax revenue expected from new development and the expected cost of services that will be demanded by the new development. When the tax revenues for the city are expected to exceed expenditures by a significant amount, usually in commercial development, local officials are able to overcome neighborhood opposition, sometimes by sharing the windfall with the neighborhood in the form of new amenities like a park.

    When expenditures are expected to exceed revenue, it’s a different story. In Mass, for example the average single family house pays $3,000 per year in property taxes (multi-families are lower per dwelling unit), while the average expenditure per by local jurisdiction per pupil is about $8,000. It doesn’t take a fancy DSGE model to figure out that those numbers are going to bias local officials against new residential development.