Sunday, November 19, 2006

The cost of urban planning

There is no doubt that urban planning creates potential welfare gains in the sense that it reduces the effects of inevitable negative externalities associated with urban life. But, observation of actual processes of land-use regulation leads to the conclusion that there can be little doubt about significant costs associated urban planning as well.

Last month Ed Glaeser and Bryce Ward published a working paper entitled "The Causes and Consequences of Land Use Regulation: Evidence from Greater Boston" [see]. In it the authors claim that the behavior of housing prices cannot be explained by the scarcity of land alone. Glaeser and Ward claim that regulatory restrictions on supply are to be blamed for at least some of the phenomenon.

My doctoral student Rafi Roth and I have been working with a simple model of real-estate developer whose investment decisions are influenced, by among other things, the characteristic time of development. We defined characteristic time as the time from the moment that initial property rights are purchased and until the income is received for the finished real-estate product that the developer has produced and sold.

It turns out that characteristic time is influenced principally by urban planners and that it varies in particular fashion across space. Furthermore, it is largely responsible for observed leap-frogging behavior of development, especially during periods of economic downturns. In some sense planning has a counter productive effect in the sense that it creates incentives to build away from existing built-up areas.

Moreover, it is possible that under some conditions the cost of planning actions is borne by lower income groups.

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