Sunday, January 10, 2010

Zoning: Regulation, Community Property Right, or Both?

Frank Stephenson at D.O.L. remarks on Levine's Zoned Out:

I do have one quibble--the author can't quite make up his mind what we economists think of zoning:

p. 80: "[T]he very meaning of zoning as a collective property right--a view now broadly adopted by the economics profession ..."

p. 87: "Economists and other social scientists have split on the nature of zoning--with some viewing it as governmental regulation and others viewing it as more akin to a 'collective property right.'"

I have not read the book in question, but I actually would agree that the economics profession is of two minds about zoning: one as regulation and one as a collective property right (CPR). I think your modal economist would see it as regulation, but your modal economist researching and publishing on local public finance or governance structures are more likely to view it as a CPR. Richard Epstein would be an obvious candidate for disagreement.

I'm going to provide some explanation of the CPR view.

On paper, zoning is indeed regulation, having very specific prescriptions with ambiguous intentions. In function, what they are trying to do is protect home owners from negative externalities, both pecuniary and technological. Since all technological externalities (noise, traffic, etc) are capitalized into housing prices in the same way as if a bunch of new housing were constructed in the area, home owners and zoning officials have little reason to differentiate between them.

At the same time, it is extremely difficult to get around the fact that externalities are a big deal, and any nuisance is not just annoying, it is costly. Furthermore, in a world without zoning, new housing can be constructed quickly if demand is expected to rise. If demand falls construction will stop, but the housing stock is not likely to change a great deal (in part because of demolition costs). This makes externality-sensitive housing a rather asymmetric risk. If demand rises in your area, housing will only appreciate at the marginal cost of construction, but if demand falls your price falls steeply.

Furthermore, your neighbors have a pretty good incentive to ignore externalities when they sell their homes. If your neighbor sells their home to someone who wants to renovate the property into a noisy bar, he doesn't have much incentive to consider how this might impact his ex-neighbors. Note that, although the noise is a technological externality, it will have a negative pecuniary effect on the neighboring homes.

Enter the role of zoning. The CPR view begins by thinking of a given municipality as a supplier of institutions and property. The institutions are going to consist of a mix of taxes, public goods, and mechanisms for handling externalities (i.e. zoning). Developers or other commercial producers are on the demand side of this market. They are likely to bring benefits (tax revenue, local demand for property, etc) to an area, as well as new pecuniary and non-pecuniary externalities (congestion, pollution, new supply of alternative residences, etc).

Zoning serves as an exclusionary purpose (like a property right) to these entities, but remains open to change pending some negotiation. In fact, zoning is probably the most malleable legal institution in the United States. While the stated objective of zoning commissions is often ambiguous, in practice they serve the purpose of evaluating demanders of institutions/property to verify that their expected benefits outweigh their costs, which will be signaled through their expected consequence on existing property values.

I don't mean to say zoning is all roses and fine wine, the critics of zoning have good points. Zoning commissions make both type I and type II errors, inflate housing prices, can get captured, engage in regulatory taking, etc. Any industry with more than 30,000 firms would likely have more than a few bad apples.

I think the community property rights view is quite correct in the positive analysis of zoning, but the open question is the normative implication. As of now, I lean towards a more Ostromesque view that zoning is a way that local communities have evolved to deal with externalities, and I would be very hesitant to impose some kind of reform that stripped them of this mechanism.


Josh Hall said...

Well said. I would only add that from a first-best normative perspective, the use of zoning to stop pecuniary externalities is not a good thing. This is why we get exclusionary zoning, for example. In the world of a second-best, however, the Ostromian (sp?) view is where I would end up on the normative spectrum.

Frank said...

Nice post Justin. Just to be clear about my post--I think economists are split in their view of zoning. (No surprise there since we're split about many other poliicies--e.g., stimulus.) I was poking at Levine, though, for on one hand saying economists are two minds on the issue and in the other instance saying we all agree that zoning is a CPR.

An aside: At least part of the externality problem comes from the heavy reliance on property taxation to fund local services. Zoning would be less necessary to remedy externalities if head taxes or public school tuition charges were possible. That would raise many other issues, of course.