Tuesday, February 26, 2008

Land Use & Development Rights

Under the banner of protecting property rights, a number of states have passed laws requiring compensation if land use regulations lower owners' property value. This slogan ignores the fact that regulation of one person's property often increases the value of neighboring property including public interests in the environment. For example, a regulation restricting building on coastal shorelines may prevent some owner from putting up an intensive development and thereby make his parcel less valuable, but it may protect the shoreline from erosion and losses to other owners. The issue is which owners count.
The voters of Oregon passed a 2004 law allowing owners to seek compensation if state and local regulations reduced their property values. Voters probably had in mind individuals who wanted to build a house on their property, but it was widely used for large housing projects, strip malls, and landfills.
The voters thought again, and in Novemeber, 2007, approved a law preserving a landowner's right to build homes, but curbs large commercial and industrial development. A coalition of farmers, business groups, and conservation groups such as the Nature Conservancy spent $4.5 million to support the new law. These coalitions are hard to put together as many are tempted to be free riders, as the results of the campaign are available to all whether or not they have contributed (a high exclusion cost good).
Source: Nature Conservancy, Spring, 2008.


brady said...

The central issue you identify is
"...which owners count," or, alternatively put, who are the winners and who are the losers. I think this is one of the key issues we must address.

I'm curious as to your thoughts on questions regarding (1) the magnitude of these gains and loses and the related issue of (2) normative criteria for evaluating land use policy: e.g., compensation criterion or Cost-Benefit approaches.

As an aside, approximately 1.8 million acres of land (mostly farmland) surrounding the Greater Toronto Area (GTA) was designated by the Provincial Government as a "Greenbelt" in 2005. Farmland in the "Greenbelt" can not be developed for non-ag. purposes (e.g., residential development). Recently, this past week, there was a proposal to expand the Greenbelt.

Allan Schmid said...

1. Regarding the magnitude of gains and losses: Generally, the courts have tried to balance the interests by allowing some development, but not prohibiting it completely.
2. Normatative criteria: Suppose the landowner would gain $1 million with commercial zoning compared to single family. Suppose the neighbring single family owners would collectively lose $2 million. In principle, if the right were given to the commercial developer, the single family owners could buy-out the would-be developer. But, the transaction cost of organizing the bids of many homewowners may prevent the bid. In practice, we commonly observe that few trades occur after a court ruling giving the right to one party or the other.
A problem with benefit-cost analysis is that the location of the right affects values. The willingness to pay and willingness to sell may not be equal. Willingness to pay is limited by income, but willingness to sell is not.