Economics of the metropolitan area 212G, Spring 2013

1. Economics of the metropolitan area212G, Spring 2013 Professor: Keren Mertens Horn Office: Wheatley 5-78B Office Hours: TR 2:30-4:00 pm E-mail: Keren.horn@umb.edu

2. Recap: Suburbanization or sprawl? • People who call it suburbanization believe: • That low density development outside the central city is a form of urban growth, not a cause for alarm. • That people have made optimal decisions about their residential preferences, their employment and their commutes. • Call this theory of suburbanization “natural evolution” • People who call it sprawl believe: • That poorly planned cities are expanding at unprecedented rates. • That Americans would be better off if they lived closer together, worked closer together, and used more mass transit. • Call this theory of suburbanization “flight from blight” • Today we will talk about how government regulates land uses

3. Regulating land use Zoning!

4. What is zoning? • Zoning is “the division of a community into districts or zones in which certain activities are prohibited and others are permitted.” (Fischel, 1985) • In each district, zoning codes define what types of buildings are permitted or prohibited—ex/single family homes only, permitted commercial uses like a laundromat • Zoning codes also set limits on the size, bulk and location of buildings—ex/how high they can be, how far from the curb and from other property lines they must be set back, and how much total floor area they can encompass

5. Zoning example

6. Why zoning? • Zoning is a way of regulating land uses • Economists usually suspicious of regulations • “Blunt Instrument” – unlikely we will set level of regulation appropriately to get to socially efficient output level • Usually prefer prices, which can be adjusted towards the true marginal cost of an activity (including external costs) • Mechanisms such as taxes • Ex/Pollution – tradable permits more efficient than regulations • Under what circumstances may economists support regulations? • When health and safety are involved – costs of producing too much are very high (ex/too many people on a ship) • When its too difficult/troubling to place a dollar value on external costs (ex/when changes are durable/irreversible, like destruction of wetlands)

7. Use zoning • Classic reason for zoning, to separate land uses. • What is the underlying problem that separating industrial sites attempts to address? • Use externalities • Ex/Zoning out factories • What are the specifics of this approach? • Designates a list of allowable uses for particular spaces • What are the expected market outcomes? • Depends on whether externalities do in fact exist

8. Use zoning – with externalities Rent Zoning Boundary DWL no zoning Dr MSB Dm No Boundary Distance from Commercial Area

9. Use zoning – no externalities Rent Zoning Boundary DWL Dr Dm Dm2 Distance from Commercial Area

10. Use zoning • If externalities are present than it could be efficient for the government to set a zoning boundary. • If they get the boundary right! • Problem with using zoning to handle pollution? • Doesn’t reduce pollution, just moves it around • Alternatives: Performance Zoning • City sets performance standards for each zone, polluting firms must locate in industrial zones, cleaner firms can locate closer to residential areas • Encourages abatement because it gives cleaner firms more location options

11. Apartment building?

12. Use zoning for apartments? • What is the justification for zoning out apartments? • Traffic and noise • Light and air • Character of area? • Other motivations usually highlighted • Fiscal Zoning – since local jurisdictions are funded mostly by property taxes, they have motivation to zone in uses that will contribute to the tax base • Want to attract households who are “fiscally neutral” • Exclusionary Zoning – existing residents want to keep out different types of residents from their neighborhood • May be ways to internalize these external cost rather than prohibiting them all together • In practice communities sometime allow larger developments into their neighborhood, and charge them a fee – exactions

13. Zoning and sprawl • How does zoning affect the way our cities develop? • Two sides of the argument: • Large-lot zoning often blamed as contributing to sprawl • Zoning in the form of tougher land-use regulations often seen as saving us from sprawl • Ex/Growth Controls

14. Growth controls no external costs Rent Growth Control S DWL D 100 permits 120 permits Number New Homes

15. Growth controls external costs Rent Growth Control S DWL D MSB 100 permits 120 permits Number New Homes

16. Zoning and poverty • Does zoning make low-income households worse off? • If zoning is not affecting the location decisions of low-income households then it is possible that it has no affect on low-income households. • In cases where zoning prevents the construction of housing that could be affordable to low-income households (exclusionary zoning), then yes it does make low-income households worse off. • Could zoning make low-income households better off? • Inclusionary Zoning? • Smart Growth?

17. Inclusionary zoning • Basic premise of most attempts to change zoning to help poor people has been that exclusion is not a legitimate goal of zoning • New Jersey Supreme Court Case – Southern Burlington NAACP v. Township of Mount Laurel, 1983 • Exclusionary Zoning unconstitutional • Response has been to mandate inclusionary zoning • Under inclusionary zoning developers are required to set aside a fraction of the units—often 15 or 20 percent—for sale or rent to low-income people at below-market prices. In exchange they are often given density bonuses so that they can build more housing. • Like development tax – example • Developer required to build 5 dwellings for lower income households and loses $10,000 per unit • This $50,000 cost will be spread across 50 houses, or tax will be $1,000 per unit. • Cost will be passed onto consumers (housing prices increase) and landowners (price of vacant land decreases)

18. Smart growth? • “Building urban, suburban and rural communities with housing and transportation choices near jobs, shops and schools. This approach supports local economies and protects the environment.” • Smart growth initiatives often include both growth controls and mechanisms to ensure the development of affordable housing • Example • Massachusetts governor Deval Patrick announced a new policy initiative designed to encourage diverse, walkable neighborhoods that use land efficiently • If towns meet certain criteria will get preferential treatment in applications for state assistance funds • Municipality must adopt an “as-of-right” zoning district that provides: • Minimum density of 8 homes per developable acre for multifamily housing; 4 units per acre for single-family homes • At least 10 percent of homes must meet affordability criteria (unless a project includes fewer than 12 homes in total) • A policy of inclusion that does not restrict occupancy due to “age or any other form of occupancy restrictions”

19. Discussion questions for Thursday • Do you agree with Yglesias (Economist article) that perhaps giving low income households a check may be a better use of the same limited resources than creating affordable housing through inclusionary zoning programs? Please support your argument. • Why do you think Governor Patrick would support an initiative to “encourage diverse, walkable neighborhoods that use land efficiently” in Massachusetts? • Do you think that Dublin, Ohio’s land use initiatives (specifically creating a walkable, lively, mixed-use district with a master plan and appropriate rezoning to support this district) could be successful in attracting members of the Millennial generation? Why or why not?