Bryan Caplan  

"Do the Opposite": Hanson on Externalities and Zoning

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A while back, I wrote:

In a classic episode of Seinfeld, George Costanza realized that his instincts were fundamentally wrong, and vowed to "do the opposite":
George: Elaine, bald men, with no jobs, and no money, who live with their parents, don't approach strange women.

Jerry: Well here's your chance to try the opposite. Instead of tuna salad and being intimidated by women, chicken salad and going right up to them.

George: Yeah, I should do the opposite, I should.

Jerry: If every instinct you have is wrong, then the opposite would have to be right.

George: Yes, I will do the opposite. I used to sit here and do nothing, and regret it for the rest of the day, so now I will do the opposite, and I will do something!

The same lesson often applies to government intervention. Yes, market failures do exist. But when you look at "corrective" policy, it often turns out to be the opposite of what economic theory recommends.

Marginal Revolution guest blogger Robin Hanson has a new thought-provoking example of how regulation aggravates market failure instead of soothing it:

Land in populated areas is valuable mostly because other people live nearby; people with whom one can have social, job, and shopping relationships. While our neighbors often hurt us, their net (and marginal) effect is on average positive, and huge.

This externality, however, mainly comes from the people on nearby land, and not from their gardens. So when we consider how much land to use for our homes or offices, we do not consider the gains to others from our using less land, and so allowing more people to be nearby. We also neglect the benefits we provide others when choosing to live at the edge of the populated area, versus living in an unpopulated area.

These neglects suggest a big market failure, wherein housing and office density, and the size of the populated areas, are too small...

Local governments are in a position to reduce this externality, but they seem to mostly make matters worse. Minimum lot sizes, maximum building heights, maximum densities, and barriers to development at the populated edge are far more common than their opposites.

Robin's prescription, in short, is: maximum lot sizes, minimum building heights, minimum densities, and subsidies to development at the populated edge. It's not Free to Build, but it's more efficient than what we've got.

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COMMENTS (11 to date)
Lord writes:

Thankfully there is more to life than efficiency.

Victor writes:

Perhaps the best lesson here is that popular support for government action is generally dependent upon preferences and not sophisticated arguments about corrections for market failures. Democratic gov't frequently magnifies the failings of people rather than acting to eliminate those failings.

As Kling just noted in his OPEC post, the medicine that economists might advocate is frequently a political non-starter.

The very framework of "market failure" versus feasible corrective government action has itself been a significant "failure" of rhetoric within public economics. It has encouraged the devolution of economics into an institution that can be ignored when inconvenient and cited for justification when its prescriptions agree with one's priors.

Barkley Rosser writes:

Desirable people nearby and land values do not necessarily correspond, as the fights over the extension of sewer interceptors and the fate of minimum lot size zoning (MLZ) in Calvert County, Maryland show. Same issue appears in the hunt country to the west of the exploding exurbs of Northern Virginia, where there are no sewer interceptors and MLZ is definitely in place.

What's up here. There are health restrictions on lot size for the functioning of septic tanks when there are no urban sewers (symbolized by the mighty interceptor that gathers all the street laterals that gather all the house laterals to go to the big treatment plant, there being economies of scale in STPs). If there are sewers there can be dense housing, townhouses, apartments, and so forth. Such housing can be full of not so terribly rich people who may not even be owners, and who might be of an unfortunate color or ethnic membership. The lots on which large numbers of people can be packed and paying, even if individually they are not all that rich, will sell for high prices.

If only large lots are allowed, then only fairly high income people can afford to buy them. The per acre price will be lower than if high rise apartment building can be built, but the overall price of the estate (think hunt country) may be prohibitive for low income people. So, if you want a bunch of rich WASPS around you in your pseudo-aristocratic country estates, then you want the lower per acre prices that come with MLZ and no sewer interceptors.

This is indeed the issue in Calvert County, where the fight is on over a possible sewer interceptor extension. It becomes all the hotter because Calvert is southeast of Prince George's County, where all the African Americans being pushed out of downtown Washington by the gentrifying yuppies are moving to, and those being pushed further out look likely to head into Calvert, if they can afford to, whose older resident population are sort of southern rural white types who...

BTW, gardens do provide serious externalities. I realize that this is the first time Hanson has taught urban economics, but he is a smart guy and he will learn.

daveg writes:

Why do you have to go to the WASP blast? Hasn't the WASP boogieman been beaten to death.

I live a neighborhood that pretty much fits your description - 2.5 acres is the norm, but no hunting.

Believe me, there are many non-WASPs including lots of Asians and Jews. Maybe you want to add them to you list of potential resource consuming neighbors?

Jim Greenleaf writes:

For some reason none of the proponents of no minimum lot size, no maximum height, etc never themselves seem to want to live in the results of these policies. That's not to say that density done right can not be done, but it costs more than density done poorly - why should I suffer the externalities of you making an extra buck when you cut corners on your project

Robin Hanson writes:

I agree with Barkley Rosser that minimum lot sizes and other rules are often put into place in order to try to keep out poorer people. And while gardens do provide some externalties, my claim is that the magnitude of those externalties is usually less than that from more people.

Barkley Rosser writes:


Would seem that Robin Hanson mostly agrees with me. The history of zoning is that it came in during the 1920s during a period of KKK enthusiasm to keep out non-WASP immigrants. The Supreme Court case was in 1926, Amber vs Euclid, the latter a suburb of Cleveland, and while zoning can be justified on internalizing externality efficiency grounds, in that case it was clearly a matter of keeping out undesirables. The Supreme Court granted the authority as part of "police power."

BTW, I did not see you say that there are any Mexicans or African-Americans in your neighborhood. Heck, Jews were not apartheided in South Africa, a place where visiting Japanese were viewed as "honorary whites." Sure, the new gated exurb communities have well-off Asians and Jews, not to mention the occasional Irish or Italian Catholic.

But in the older areas, WASPdom still counts. It does in the hunt country of Virginia, where indeed you had best be a southern WASP. In Calvert County they are likely to be English Catholics, WASCs, given its proximity to the origin of the state.

daveg writes:

Prof Rosser,

You seem to be confused between rich and poor, and WASP and black.

You aren't the kind of racist that thinks all black people are poor, are you?

Why do you have to take econmoic exclusivity and turn it into a racial thing? Do you think the "WASPs" of Virginia would like lots of poor white people moving in the neighborhood?

And just for the record, I know of one black family (ex-major league ball player) living in our community, as well as one South American family.

This is just what I am aware of. I don't know every family in the area.

My advice: stop using racial or ethnic generalizations, even the politically correct WASPs, in your example unless it truly adds to your point.

Barkley Rosser writes:


Gosh, you sure figured me out. Just another ignorant racist who can't tell a rich cheese doodle from a poor and buzzing WASP. Guess I'll just retire to my hunt country estate and see if I can find where I misplaced my brain.

For further evidence of my overwhelming idiocy and racism on this topic, please see

J. Barkley Rosser, Jr., "The Theory and Policy Implications of Spatial Discontinuities in Land Values," Land Economics, November 1978, vol. 54, pp. 430-441,
J. Barkley Rosser, Jr., "The Dynamics of Ghetto Boundary Shape and Movement," Urban Studies, June/July 1979, vol. 17, pp. 231-235.

Paul N writes:

I strongly prefer Free to Build. I disagree that there's a market failure. I think Hanson undercharacterizes the problem and takes an overly theoretical view of US housing that is not accurate. People will and do build densely on their own if free to do so. There are many densely-built areas that don't show these positive externalities, and not just public housing projects. If density is all that's required, why do inner cities laid out before cars existed suffer abandonment and crime while suburbs abound?

I appreciate Hanson's innovative thinking - I wish there were many more people like him - but this is far from the first time he prescribes a massive government intervention as a solution to what he diagnoses as a market failure (e.g., surveil people to see whether they're working or not for tax purposes, institute markets to guide policy-making because democracy isn't good enough, limit health care spending to combat the zero aggregate marginal effect of medicine). By some measure, he must be the most pro-government of all the econ faculty at GMU.

I was in Paris for our 20th with my wife and then in the Bay Area of California for a wedding and I found myself wondering what French style housing along the BART would do for the local economy.

I do think you could sell the concept much better as Parisian style living along the BART/rail line than as high density housing. Maybe it only works well in France.

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