In defense of zoning

Crossposted at and Zoning has been criticized by many of a libertarian bent as denying individual property owners the right to do what they want with their property. It has also been criticized by densificationists who declaim the damnably high rents induced by real density caps enabled by zoning. I discussed some of these issues relating to height limits yesterday. I am of a libertarian bent and I like density, so why do I, in principle, think zoning is a useful concept?

Hong Kong skyline at night. Image from Kent Wang via Wikimedia.

Buy the sky and sell the sky

Economics talks about negative externalities, the outcome of a transaction between two parties that negatively affects a third. The classic example is air pollution. A has a factory making parts for B, but the factory pollutes the commons (the air), and C is harmed. The best theoretical solutions are either to have enforceable property rights (eliminating the commons), or establish appropriate prices for pollution, or to somehow internalize the costs by having the same person control both the production and consumption of the externality (e.g. the pollution and the air). Since we neither but nor sell the sky, nor even rent it, we must look for some other alternatives.

But regulate the land

Regulation is a second best solution. As I have suggested previously, Zoning, like other regulations, aims to achieve what could not be achieved through property ownership or monetary prices. Those solutions often fail for a variety of reasons, but the dominant is transaction costs. It is not costless to impose prices, and it is often impractical to create enforceable ownership of commons like the air. Even if there are clear property rights, enforcement might be expensive if it must go through the court system. Try to prove whose pollution made you sick and you can see the difficulty.

On economies of externalities and zoning

Zoning is a specific form of regulation aimed at restricting certain land uses in certain places, because of the negative externalities they create that are difficult to address via property rights or prices. While historically these externalities where flying shards of rock from gravel pits, more recently they are concerned with air pollution, smells, litter, street congestion, on-street parking, and other public service crowding. One might argue whether these items are truly externalities. No one owns the on-street parking in front of their home, they don’t have a legal right to it (unless there is a permit system). But the custom is that they do have that expectation. Tacit rules exist. Even if these are not “technical externalities”, they are still “pecuniary externalities“. Upzoning drives up effective costs in markets (or commons) for road space, parking space, park space, school enrollment space, etc. by making that space scarcer. That some or all of these ought to be private goods is not a relevant rebuttal, as they are not now private goods, and until they are (and maybe after) the losses remain. The neighbors (the NIMBYs) don’t want more development than they bargained for. When they bought their current property, there was a set of laws on the books regulating development on other properties. While legally I don’t generally have a property right in someone else’s lack of property rights, I have an expectation of policy continuity, and paid something for that expectation when I bought my own property. When someone else tries to rezone their property, (or the government proposes it), they may harm me. I may have more local air pollution, more malodorous neighbors, more broken beer bottles on my front lawn from inebriated friends of the nearby youthful renters who are otherwise undoubtedly good people except when they themselves are drunk at 2 am on a Saturday morning, more traffic on the roads (and thus more time in traffic), more strange cars in front of my house, more crowding in public school, and so on. While there may be great social benefits to this arrangement, either through lowered costs of public service delivery or greater economic productivity associated with the huddled masses, there are quite likely higher private costs similarly associated for at least some. It is not enough that everyone might be better off. Unless some form of compensation is given to the neighbors from the great benefits such up-zoning entails, there is no reason for them to be in favor. Zoning creates this Economy of Externality by reducing suboptimal spatial adjacencies that experience suggests generate negative effects. Recall that externalities require not just a polluter but also a pollutee. If no one is in the woods is to hear, the drunk partier did not create a noise externality. If you don’t move next to my kosher pig farm, you will not by bothered by its smell. If you do not live next to the gravel pit, its flying shards will matter not. [Minneapolis has seen these problems with the Pillsbury A Mill project, which has been downscaled both due to local complaints and market conditions].

Pillsbury A-Mill. Image from Appraiser at Wikipedia.

Compensating for Tacit Rights

This is not to say any particular zoning regulation is appropriate, efficient, or equitable. It is to say there is a ‘fact on the ground’ that has created a set of tacit rights that ought not be blithely unseated without expecting to provide compensation from the putative gains by rezoning or dezoning to those for whom this implicit contract between the public and private owners has been made. There are lots of options for providing these economic side payments. There has been some preliminary discussion about side payment in research on congestion pricing, but this needs to go much farther. This can be applied for all types of transportation investments and land uses at various scales. There will always be arguments about price, but if the neighbors ask too much, status quo ante prevails (the developer won’t develop). If the land use revolutionaries offer too little, the status quo ante prevails (the local politics will not permit approval). If there were truly gains from trade, there should be a core to this transaction. The logic of the ultimatum game might be informative. We need to enable the neighbors to be winners too if we want them to support changing zoning and other land use regulations.

Top image: Melbourne CBD zoning map 1964. Government of Victoria.