Three Key Concepts in Urban Planning

There’s been a lot of talk about transportation and housing development in the news recently. For example, I have discovered a deep love of hate-reading “Cars v. Bikes” and “Density v. Character” articles. I have also discovered that nearly every citizen is an armchair urban planner, and if we’re going to talk about this anyways, I want to clarify a few jargon terms that have been popping up that aren’t the most intuitive concepts to understand right away. I wanted to have this article on hand so the next time we’re all stuck in the Star Tribune comment section and someone says something stupid, we can link them to this article which they can ignore before unleashing an epithet.

First we have “negative externalities.” 

Negative externalities are the bad things that happen to people other than yourself when you do  something. In the context of transportation, the king of negative externalities is, of course, the automobile, lapping the field by about 1,000 country miles.

Here’s an example. Let’s say you crash into a building. Hypothetically, let’s just say the building in question is the Groundswell coffee shop in Saint Paul. If you’re on a bicycle, the negative externalities are limited to the staff being interrupted from their work when you limp inside to ask for a couple bandaids. If you’re walking, there are only positive externalities because everyone who watched you bounce off the window had a good laugh. If you’re driving a car… well… let’s hope you missed the patio seating.


A second term is “induced demand.”

The term “induced demand” is a great way to justify your 4-year degree instead of just saying “if you build it, they will come.”

The point is that humans are great at working within systems. All of our best or worst moments in history are the result of enough people following along with a thoughtfully designed system. When we’re talking transportation, induced demand is why expanding highways to cure congestion is dumb. It’s dumb because when you build those extra lanes, expanding the car system, the only thing you’ve done is induced more people to drive. By making that mode, driving in a car, the easier choice, you’re amplifying the numerous negative externalities that come along with car usage.

(See what I did there?)

Let’s explore induced demand for a moment because it comes up all the time. Imagine you’re going to the movies. You can get to the theater either by car or by bicycle. If you take the bicycle, there’s a bike path directly to the theater only a mile away. Let’s say that if you take your car, the same trip would take 5 miles because there isn’t a direct route.  

Unfortunately for the drivers, this hypothetical direct bike path takes up a lot of space and cars aren’t allowed on it. Even if they were, it wouldn’t feel safe to drive a car on the bike path because too many cyclists would be weaving around at high speeds, and some of them would be completely wrapped up in their cell phones.

(You could be killed! Wait. No. Which one were we talking about again?)

OK. Finally, we have the third important term. This one is from housing: “artificial scarcity.”

Artificial scarcity is really more of an economics term, but it comes up a lot with housing. Artificial scarcity is when a resource’s availability is intentionally limited.

In context of housing artificial scarcity is created when there is demand for housing, but an appropriate amount of housing can’t be built because of things like zoning ordinances or groups of homeowners who feel entitled to dictate what happens on land they don’t own. Think back to Econ 101 and The Law of Supply and Demand, and you’ll understand why artificial scarcity is so appealing. As long as that demand keeps building, and as long as the supply doesn’t grow along with it, the chunk of the supply that homeowners own gets more and more valuable without anyone having to actually add tangible value to it.

OK, time for a pop quiz!

Let’s tie it all together in one last example. Rising rents are one of the negative externalities of artificial scarcity in the housing market. One way we could help ease those negative externalities and reduce that scarcity would be to change our zoning laws to allow homeowners to build “granny flats” on their property. This would induce demand for building granny flats because it would be a good value add for property owners that they previously didn’t have access to due to exclusionary zoning ordinances.

Any questions?

21 thoughts on “Three Key Concepts in Urban Planning

  1. Mike

    Another example of artificial scarcity is when newly constructed apartments only advertise select units as available to drive up demand for their properties while many units sit empty and they claim low vacancy.

    1. Isaac

      This would lower supply, not increase demand. Potential tenants would end up in competing properties, meaning the hypothetical building in question intentionally turns away business. Makes no sense.

      1. S. Davis

        It works because the landlords have deep enough pockets to wait until they can lease apartments at the high rent they want. Eventually they get it. They will NOT lower rents.

  2. David Greene

    About those granny flats:

    Yeah, when I asked someone what he paid for his, he said $250k.

    Almost no one is going to be building granny flats in Minneapolis at those prices. It would be literally cheaper to buy a house and land!

    1. Sean Hayford OlearySean Hayford Oleary

      Wow! In the back of my head, I had just sort of assumed a new garage with small ADU was about 100k, but had never really researched it. At that price, it seems “imaginable” but not at all imminent. At 250 — that is not happening ever. I’m sure a lot of things could make that go up and down, from size to topography to how challenging it is to run sewer back there.

      It seems like interior ADUs are a much cheaper option for most. Less fashionable than a cute granny flat in back, but many basements already have a bathroom and egress window. Modify your back entrance to create a secured door into your house and add a kitchenette, and you’ve got a little rental unit.

    2. Monte Castleman

      You can still commission a stripped down “House of 77 Gables” in the suburbs for around $300,000. (If you want to buy something ready to move in it’s more like $350-$400 because when builders spec build they like to build base models with more options or higher end models). Unless you really want to live in the city, and want to live on a specific property like next to your family, it’s hard to see the advantage of that over a new house in the suburbs, or a pre-owned house or a condo in the city.

      Likely even with a much smaller footprint, the economics of a custom designed ADU on a lot with existing utilities and whatnot do not compare favorable with building 30 of the same floorplan at once with the same crews in the same location.

      1. Sean Hayford OlearySean Hayford Oleary

        But how custom-designed do they need to be? Many garage kits have upstairs lofts that could be outfitted with additional components to be a small ADU.

        Yeah, sure, somebody has to build it on-site, but I a basic 2-car garage is about $20,000. It’s really $230,000 to build the loft and manage utilities through it?

        1. Adam MillerAdam Miller

          Not that it particularly matters to your point, but having built a new garage after we bought our house in Minneapolis, a basic 2-car garage is more than $20,000. Probably at least 50% more.

          1. Faith

            The utilities are really expensive. That cost can easily run at least $30k alone just to connect to the main house water, sewer and electric, since you need to make connections to your existing pipes, add an electric subpanel, then run a deep trench through your backyard. There needs to be fire separation (i.e. extra drywall & proper caulking) between the garage and the unit above plus around the stair – say $10,000 for some of this work. You need a thickened slab for a frost free foundation to meeting building code – so another $10,000 in concrete work above a basic garage. Then add a 500 sf unit at $2/sf for $100,000. Add the cost of utilities plus the cost of a garage, and you’re looking at least $180,000 as a base cost. It’s not hard to see how exterior ADUs come in over $200k. Interior ADUs will be much more affordable since the main structure is closer to current building code for habitable space than a garage would be.

            1. Monte Castleman

              Also, does a “basic garage” have enough room that has enough headroom in the loft to reasonably have a living space as opposed to storing junk? Or do you need a custom designed garage that has a higher roof?

            2. Monte Castleman

              The problem with interior ADUs is that it would seem to combine some of the worst elements of single family home living (yard to mow, driveway to snowblow) with some of the worst elements of condo living (another family living so close you can smell their cooking or hear their stereo or bedroom activities.) Ideally you’d want to add laundry facilities upstairs too which may not be trivial.

              1. Sean Hayford OlearySean Hayford Oleary

                But main floor laundry is a popular thing to add in remodels anyway, that have benefits even if you don’t rent out the basement. Just: don’t abandon the basement laundry room.

                I dunno, I think noise-wise it could be pretty tolerable, especially if you took the time to choose appropriate materials and treatments for the unit.

                Faith — thanks for explaining some of the expenses involved. That was helpful.

  3. Andrew Andrusko

    It is important to clarify that all of the cited concepts are economic theories and accepted principles. Urban planning is interdisciplinary and borrows key tenants of many other fields. It could be argued that these aren’t truly specific to urban planning at all, and, that an approach to urban development could be purely economic. A purely economic view was the primary reason negative externalities were used to justify the need for land use planning and zoning: to reduce conflicting land uses and to protect the public health, safety and well-being.

    That being said I think we should be a little less concerned about ‘being right’ and when ‘someone says something stupid’ and more focused on the educational piece that is in this article. The most influential theory of urban planning today is called communicative or collaborative planning. This approach allows for a wide variety of input from diverse groups in a community that will be formed to arrive at a consensus based on a common understanding of the range of alternatives and their outcomes.

  4. Tom Emerson

    The garage isn’t a part of the ADU, so you should back out that cost to get to a more accurate number. Assuming you’re going to at least tie back to your electrical box, if not add a sub panel anyway, you can drop out that part of the cost as well. If you are in for 150K, you’re looking at about $700 on a 30 year note. I don’t know what rentals are in your area, but a 1 BR here is at leafs twice that. Remember also, that you have added value to the property.

    1. Sean Hayford OlearySean Hayford Oleary

      I’m curious about prevailing rates. I would assume you’d collect maybe 75% as much as an equivalent unit in a normal apartment building? In central areas of Minneapolis, 1400 seems to be the minimum for a new 1-br or studio alcove. So my best guess would be $1000 or so for the ADU.

      But that’s a total shot in the dark. Anybody know what people pay for these?

      My assumption that it is at a discount is that it would be a lack of amenities, limited view, and more informal feel to staying in an extra unit in someone’s back yard. On the other hand, it provides an opportunity to live in a quieter neighborhood with a yard, that might appeal to some.

  5. Donna Kendrick

    It sounds like most of the reply-ers are looking at this from a perspective of wanting to become landlords? With the amount of money you are talking about, you could flip 2 or 3 houses (or at least you can in Memphis). Then you could either rent them or sell them. We have a sad, I think unique situation here where little houses are rented for $600 to $1000 to poor hardworking families and most of them are a piece of crap. The landlords a lot of the time are using a rent-to-own program which you can imagine hardly ever results in the property actually changing hands. I’m not sure what the answer is, but our more urban suburbs are packed with boarded up 2 and 3 bedroom houses built from 1900 to 1950. I’d love to do something about this.

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