The Economics of Land Use Controls

From an economic perspective, an ideal system of land use controls would be one that charged every user of land for the harm their land use caused those who used surrounding land, and that would also give each land user a cash credit for the benefit of their land use to those using surrounding land. It would be easier to create such a system of land use controls in a society in which, as Henry George advocated, all or nearly all of the rental value of land was collected. Such a system could work as follows:

The land assessor in each locality would determine the rental value of each parcel of land; they would also determine the monetary value that the use of each plot of land would add to or subtract from the rental value of surrounding sites. This determination would be compared to the alternative of fencing off the land and preventing all human use. These assessments would not be detailed inquiries, property by property, but rather generalizations based on statistical studies; the underlying rental values would be estimated on a steady curve whose peaks represented where rents were known to be highest. The local government would then collect a tax equal to 90% of base rental value plus 100% of harmful consequences minus 90% of beneficial consequences.

If the holders of title to land were compensated for the publicly beneficial effects from their land usage, this would tend to raise the rental value of land in an immediate and direct way. If the holders of title to land had to pay for the harmful consequences of their land usage, this would raise rental values indirectly: When someone was charged for a harmful consequence, the corresponding penalty payment would offset the reduction in rental value elsewhere. That the land title holder was willing to pay would evidence that his property was made more valuable by the opportunity to act in a harmful way and pay the penalty than it would have been by regulatory prohibition of this action. When a land title holder refrained from a harmful act because of the ensuing penalty payment, it would demonstrate that such an action would not have been worth the harm it caused; this forbearance would thus keep total land rents higher than they otherwise would have been.

While such adjustments to rental value take appropriate account of the on-going consequences of land value uses, there are effects from changes in land value for which they do not account. A change in land use tends to change the optimal use of surrounding land. This can cause the obsolescence of surrounding buildings more quickly, and therefore a loss in value. It also tends to change the demographic of residents and businesses that would optimally occupy the area, which generates moving costs for current residents and businesses. To compensate for these costs, there should be one-time payments to the building owners, the residents, and the businesses that are renting space in the area.

I propose the following procedure for dealing with these costs. The party wishing to make a change in land use would propose a total compensation amount for the building owners, the residents, and business owners in the area. Then the land use administrator would allocate shares in the proposed compensation to the affected parties, according to her best estimate of their relative costs. There would then be a vote of the affected parties, with votes weighted by their assigned shares of compensation. If 60% of the shares voted that the compensation was adequate, then the proposed land use change would be approved and the compensation would be distributed. Otherwise, the proposed land use change would be disapproved.

One land use issue that the proposed system does not address is the tendency of localities to disapprove the construction of multi-bedroom apartments, due to the consequent increase in school costs when families with multiple children move into those apartments. The land use administrator can correctly say that the need to pay for the educations of the children who would live in the proposed apartments would raise everyone’s taxes and be likely to lower total property values. We say that we believe in public schools, but we are not happy with the prospect of paying for the schooling of all the children who would move into our communities if there were no constraints on building housing for them. To deal with this difficulty, we would either need to say that land use administrators were not allowed to count the cost of providing services for new residents as a harm charged to a proposed change in land use, or we would need to find a source of financing education other than taxes on those who live in the same community as the children to be educated.

To reiterate what was previously stated: one purpose of land use controls is to prohibit uses of land that are detrimental to both the public and/or the land itself and to prevent the effects such inappropriate land use can have on people who use the land surrounding a particular property. Current systems of land use controls have significant limitations as to their effectiveness. A more economically efficient system of land use controls would charge people for the harm incurred from land use and credit them for the beneficial effects of land use, both on an on-going basis of evaluation. There would also be a one-time charge for changes in land use. Some further reform would be needed to deal with the reluctance of communities to allow the construction of housing for low-income families.