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Encyclopedia of Law & Economics - 2200 ZONING AND LAND USE REGULATION



William A. Fischel
Professor of Economics, Dartmouth College
© Copyright 1998 William A. Fischel



1. Zoning Is a Municipal Property Right

2. Zoning Is Decentralized But Not Unpredictable

3. Local Political Authorities Control Zoning

4. Externalities and Nonconvexities May Warrant Zoning

5. Rezoning Transactions Are Facilitated by Exactions

6. The Tiebout Model with Zoning Makes Local Taxes More Efficient

7. Growth Controls and Endowment Effects Raise Housing Costs

8. Decentralized Zoning Can Cause Metropolitan Sprawl

9. Localism Trades Environmental Quality for Fiscal Benefits

10. Conclusion: Municipal Corporations Are Key Institutions


Bibliography on Zoning and Land Use Regulation (2200)


Zoning confers an interest in the property of each landowner to those whocontrol the political power of the locality. This allows municipalities to shapetheir residential environments and their property-tax base. Voters in mostcommunities will accept developments that raise the value of their majorpersonal asset, their homes. The efficiency of zoning thus depends on thetransaction costs of making mutually advantageous trades between existingvoters and development-minded landowners. High transactions costs ofselling zoning plus the endowment effect that zoning confers probably createland-use patterns with excessively low densities in American metropolitanareas.

JEL classification: R52, R14, K11, H7

Keywords: Zoning, Land Use, Municipal Corporations, Exactions, LocalGovernment, Tiebout models

1. Zoning Is a Municipal Property Right

Zoning is the most important method of land use regulation undertaken bylocal governments. It divides a jurisdiction into geographically contiguous"zones." The local zoning ordinance prescribes what may be done in eachzone and what may not be done. The great majority of the population of theU.S. lives in communities that are zoned. This essay will treat related localland-use regulations as part of zoning. Thus subdivision regulations, inwhich developers' projects are subjected to review and conditions by aplanning board, and historic preservation rules, which are often reviewedunder a separate ordinance, are regarded here as part of zoning.

Zoning comprises a protean set of constraints on land development. Mostland-use law can be amended and classifications changed without theconsent of affected property owners. Among the most frequently observedstrands of the regulatory web are minimum area per lot, use to which the lotmay be put (e.g., agricultural, residential, commercial, or industrial), maximumheight of the buildings, maximum number of units that can be placed on thelot, minimum setbacks for a building from its neighbors and the street, off-street parking requirements, and demands that developers pay for (arguably)related public infrastructure such as roads and sewers. Single-family homesare typically placed at the top of the list of uses to be protected. Early"cumulative" zoning ordinances allowed homes to be placed in commercialdistricts but not vice-versa. Modern ordinances (since about 1950) typicallyestablish exclusive zones, so that homes are not allowed in commercial areas.

In order to provide a focus for this survey, I shall advance a particularpoint of view about zoning. I regard zoning as a collective property right thatis used by the municipality to maximize the net worth of those in control ofthe political apparatus (Nelson 1977; Fischel 1985). The establishment ofzoning and subsequent changes in its rules redistribute control over landfrom its nominal owners to the dominant political faction in the jurisdiction,who may include many of the owners themselves in a collective role asresidents.

In some cases, this redistribution may increase aggregate land values(and, arguably, aggregate well-being) in the community by offering a methodto overcome free-rider problems in providing local public amenities (Hochman& Ofek 1979). In other cases, the redistribution of property rights may haveless efficient consequences. In all cases, however, zoning is viewed throughmy analytical lens as the product of rational calculation.

It is not an arbitrary constraint, even though landowners subject to it maysometimes view it as such. Nor is zoning usefully viewed as the product offar-sighted planners whose objective is to correct the misdeeds of the privatemarket, an idea even planners have given up (Popper 1988). Zoning is theproduct of a political process, and it serves the interests of those who controlthat process. The discussion of the scholarly literature in this article isinformed by this viewpoint.

2. Zoning Is Decentralized But Not Unpredictable

The study of land use regulation in law and economics has been inhibited bya lack of consensus about the "stylized facts" upon which economictheorizing normally builds. There are more than 25,000 local jurisdictions inthe U.S. that have the power to adopt zoning laws, and their authority toregulate land is derived from the legislatures and constitutions of 50 states,not from the federal government. Almost all states grant considerable latitudeto local authorities. This section will nonetheless attempt to show that thereare regularities in zoning which make it possible to theorize about it. The endof this section contains a brief discussion of sources to enable readers toexplore institutional details and cases.

Zoning laws are similar from state to state because of the continuinginfluence of the Standard State Zoning Enabling Act promulgated by the U.S.Commerce Department (under Secretary Herbert Hoover) in 1928. Nearlyevery state adopted the act or significant parts of it, and the corpus of judicialopinions that form the case law of zoning was developed largely in responseto its application. Casebooks on zoning and land use law have little troubleappealing to a national market. Differences among the states are more theresult of differences in state-supreme court opinions than in the structure oftheir statutes or the behavior of the municipalities (Coyle 1993).

Zoning has remained almost entirely a state-law issue despite periodicnational commissions decrying its parochialism (National Commission onUrban Problems 1969; Jackson 1972; President's Commission on Housing1982; Advisory Commission on Regulatory Barriers 1991). Proposals to havethe federal government penalize local governments for unreasonable zoningstandards have all died on the vine. The U.S. Supreme Court gave a boost tothe fledgling zoning movement in Euclid v. Ambler, 272 U.S. 365 (1926), but ithas largely eschewed substantive review of zoning controversies since then.

Zoning is universally regarded as part of the government's "police power"(Freund 1904). The police power is the authority to make regulations. It isseldom defined in state constitutions, because the police power is regardedas one of the inherent powers of government. It is often treated in parallelwith two other inherent powers, taxation and eminent domain. Propertydevaluations caused by police-power regulations are not compensable exceptunder the infrequently-invoked doctrine of "regulatory takings" (Epstein1985; Eagle 1995; Miceli & Segerson 1996). The much-discussed 1987-1993U.S. Supreme Court decisions that have revived this doctrine from its nearlymoribund condition pose little threat to the vast majority of zoningordinances (Fischel 1995).

It is typical for new zoning ordinances to "grandfather" nonconforming,pre-existing uses rather than require them to discontinue. Early zoningordinances envisioned the discontinuance of previously established,nonconforming uses without compensation (Weiss 1987). The notorious caseof Hadacheck v. Los Angeles, 239 U.S. 394 (1915), in which a long-establishedbrick factory was surrounded by new homes and then ordered to be shutdown (and its uncompliant owner put in jail), proved to be an early anomaly.Zoning laws adopted since the 1920s almost always allow pre-existing uses tostay if they are not overly noxious. This doctrine was not one required by thecourts (both the California and U.S. Supreme Courts ruled against Mr.Hadacheck), many of which remain tolerant of rules that provide foruncompensated discontinuance of nonconformers after a somewhat arbitraryperiod of "amortization" of capital costs has occurred (Berger 1992).

Grandfathering permits existing community residents, who control zoning,to establish more rigorous standards for new development than that whichapplies to their own. (Another method is simply to create a new, morerestrictive zone for undeveloped land; regulations must be uniform withindistricts, but not among districts.) A new zoning law that establishes three-acre minimum lot size does not require owners of homes on quarter-acre lotsto tear down their homes or acquire more land. This obviously-reasonablebow to settled expectations is an important means by which zoning practicetransfers rights from owners of undeveloped land to resident-homeowners.Because the existing residents do not bear any out-of-pocket costs, it iseasier to impose stringent regulations on undeveloped land.

Grandfathering also provides an incentive for owners of undevelopedland to anticipate regulatory changes and perhaps build excessively early toprotect their rights. (Some jurisdictions allow development rights to be vestedmerely by obtaining permits to build, but such permits are usually time-limited.) There is anecdotal evidence that such anticipation does inducepremature development (Dana 1995), and some theoretical models ofregulatory takings have incorporated it (Mills 1990; Riddiough 1997).

Urban economists have sometimes attempted to model zoning as a single-valued constraint, such as minimum lot size. Such exercises can often beuseful in working out implications of land-use constraints in an urbaneconomics model ( M. J. White 1975; Rubinfeld 1978). They can, however, bemisleading when their models allow for simple evasions of the singleconstraint (Henderson 1985). Zoning laws do not permit developers to evadea minimum lot size constraint by simply erecting larger amounts of capital onthe larger lot. Height, set-back, and single-use requirements usually stand inthe way, and where they do not, discretionary actions such as sewerconnections can be withheld from an uncooperative or opportunisticdeveloper. Monitoring is not a major administrative problem for zoning, anderrors that do become grandfathered are easily avoided for future land usesby amending the zoning ordinance.

Sources of information on legal background include legal casebooks onland-use such as Ellickson and Tarlock (1981) and Callies, Freilich & Roberts(1994) and the leading property-law casebook, Dukeminier & Krier (1993). Amonthly journal, Land Use Law and Zoning Digest, summarizes recent casesand legislation and provides experts' commentary on them. Influential law-journal articles are selected annually in Land Use and Environment LawReview. The leading planning journal is the American Planning Association'sAPA Journal. Economics journals with numerous titles related to zoning andland use include Land Economics, Journal of Urban Economics, and UrbanStudies. I treat institutional issues in chapters 2-4 of Fischel (1985). Some fine-grained stories about zoning by lawyers with a national practice arecontained in Babcock & Siemon (1985). A collection of law-review articles onproperty and land use is Ellickson, Rose & Ackerman (1995).

3. Local Political Authorities Control Zoning

The view of zoning as a municipal property right can help researchers avoidfruitless theorizing and misguided empirical work. The view assumes,however, that one can identify some people whose objectives are clear andwho can control the zoning process to their benefit. Since zoning isembedded in local government politics, this requires an inquiry into thenature of that politics.

Many observers are impressed by how much neighbors affect zoninghearings. Tideman (1969) found that nearby residents had almost completeveto power over proposed variances to permit commercial activity in aChicago suburb. (The veto power is necessarily de facto; courts haveoverturned zoning laws that formally permitted neighbors to deny variances(Michelman 1977).) Robert Nelson (1979) employed the view of zoning as aneighborhood entitlement as a springboard to reform that would explicitlyacknowledge it and permit its sale to developers.

Although neighborhoods are influential where minor changes areproposed, it is misleading to focus on the administrative actions of zoningboards when evaluating the entire institution of zoning. To be valid in mostU.S. jurisdictions, zoning must be imposed on the entire municipality, though,of course, there are different zones within the municipality. Thecomprehensiveness of zoning makes it a property right embedded in theentire community. Legal doctrine is also hostile to rezonings that affect onlyone or two small parcels, condemning it in many cases as "spot zoning."Most economic theories and empirical work have evaluated zoning assomething that affects entire municipalities.

Locating zoning at the municipal level leads to the question of whocontrols municipal politics (Danielson 1976) . The leading theoreticalcontenders are (a) the median voter; (b) the bureaucracy, including theplanning profession; (c) interest groups, including developers, real estateinterests, building-trades unions, and advocates for the poor; (d) higherlevels of government, such as state legislators and the interests they serve.

There is no widely accepted choice among these alternatives because, Isubmit, the size (both area and population) of the municipality makes adifference as to which model is relevant. The evidence in support of themedian-voter model of politics has come almost entirely from cross-sectionstudies of local government (Holcombe 1989). Within these studies, there isevidence that smaller municipalities behave more along the lines of medianvoter theory than the larger cities (Holtz-Eakin & Rosen 1989; Bloom & Ladd1982).

The small suburb is the paradigm of much zoning research. The larger thegovernment unit, the more likely interest groups will influence the process(Komesar 1978), and thus the more likely the "property rights" embodied byzoning will belong to them. But even in large cities, homeowners often havesubstantial influence on zoning because of ward representation (as opposedto at-large, citywide elections) on city councils (Clingermayer 1993).

This leaves an interesting question of political choice. If the medianvoters (local majorities) really get their way at the local level, in contrast tothe interest groups and bureaucrats who are said dominate the statehouse,what determines the division of authority between local governments and thestate? As a constitutional issue, the rule is that local governments arecreatures of the state, and the state can modify the locals' power over landuse by altering the instruments of their creation (Briffault 1990). This wouldsometimes mean a change in the state constitution for cities with "home rule"charters, but most state constitutions are easily modified and, even wherethey are not, judges are reluctant to overrule state legislative infringementson local authority. Indeed, in the tradition of "Dillon's Rule" of statutoryconstruction, judges have encouraged state supervision of municipal activityRose 1989.

As a political issue, however, the choice between state and local authorityis more complex. Nearly every state--Hawaii is the main exception--delegatessubstantial authority over land use to local governments. This is not becausestates have not thought to do otherwise. To mention only the most recentproposal, states were urged in the 1970s to assume much more control overland use. Dubbed the "Quiet Revolution" in an influential book by Bosselman& Callies (1971), the idea was to have state and regional bodies take overmuch of land use regulation from local governments. A parallel movement,pursued more by the courts than by legislators, has attempted to overridesuburban zoning decisions because of their exclusion of low-income groups(Haar 1996).

Neither of these two centralizing attempts has gotten very far. Judicialefforts to open up suburbs to housing for poor people have stalled in theface of substantial popular and legislative opposition (Fischel 1991). Manystate and national environmental laws add constraints on the discretion oflocal zoning, but very few have made locals accept projects that they do notwant (Popper 1988). Activist states such as Vermont and Oregon have largelyestablished a double-veto system, in which developers can go from "yes" to"no" in working their way up the regulatory ladder, but not from "no" to"yes".

4. Externalities and Nonconvexities May Warrant Zoning

The rationale for zoning typically offered in the economics literature is thatsome activities cause spillover effects on their neighbors and that the bestway to deal with these spillovers is to employ police-power regulations toseparate uses (D. Mills 1979; Ihlanfeldt & Boehm 1987). Both of thesepropositions have been subject to scholarly questioning.

The idea that urban spillover effects are pervasive was first challengedempirically by Crecine, Davis & Jackson (1967) for the city of Pittsburgh.Similar results were obtained for samples in Rochester, NY, by Maser, Riker &Rosett (1977) and in Vancouver, BC, by Mark & Goldberg (1986). Thesestudies estimate the value of property, most often single family homes, usingregression analysis. Among the explanatory variables (the right side of theequation), the studies include some measure of the property's proximity to thebete noir of zoning, the nonconforming use. The studies conclude thatnonconforming uses do not seem to have much effect on homes, contrary tozoning principles, and thus zoning is not justified.

Numerous other studies (more often using suburban samples) have foundthat proximity to nonconforming uses does reduce home values (Li & Brown1980; Stull 1975). But the more telling critique of the former studies is theirinattention to institutional process (Grieson & White 1989; Fischel 1994).How did the nonconforming use get into the residential neighborhood in thefirst place? Most larger cities have had zoning since the 1920s. Thenonconforming uses were most likely let into the neighborhood by a zoningprocess. To satisfy objections of nearby neighbors who appear at zoninghearings, the nonconformers may have adjusted their plans to mitigatespillovers or compensate for them. If this process works well, one could findthat nonconformers don't adversely affect average neighborhood propertyvalues. But this is not because zoning fails or is irrelevant; it is becausezoning worked to allow an efficient outcome.

A similarly indeterminate outcome is reached when one looks at theevidence that nearby nonconformities do reduce single-family home values. Itis possible that the nonconforming uses compensated previous homeownerswith a lump sum payment, and subsequent buyers of the homes werecompensated for the nuisance by paying lower prices. There is nothingnecessarily inefficient in this process: The new, nonconforming shoppingcenter, say, may have added more value to the location than it subtractedfrom the homeowners' value. For small areas, at least, it is likely that the onlyway to tell if a given land use regime is efficient is to see if it maximizes theland value of the area as a whole. (See section 6 below.)

The second prong of the traditional economic argument for zoning holdsthat the best means of internalizing spillover effects is the coercion of thepolice power. The source of doubt about this proposition is the extensiveliterature on private (that is, consensual) alternatives for dealing withlocalized spillovers. Among the best-known studies of alternatives is BernardSiegan's (1972) survey of Houston, Texas, the only large city in the U.S. thatlacks zoning. Houston does, however, have private covenants, and its overallpattern of land uses is not markedly different from other cities. Houston doesappear to have lower housing prices than other places (Peiser 1981), but, aswill be seen in section 6, it is not clear whether this is a compliment to orcriticism of its lack of zoning.

Another well-known study of covenants and nuisance laws asalternatives to zoning is by Robert Ellickson (1973), a law professor whoseeconomically-informed investigations will reward any scholar of land use.Ellickson concludes that small-scale neighborhood effects would best bedealt with by a combination of consensual arrangements and a revival ofnuisance law in which fines are the preferred remedy. (Preferred because theygive the maker of the necessary nuisance a continuum of choices to correcthis behavior.) Private covenants need not be rigid. Residential privategovernments such as homeowner associations are often adopted even whenzoning is available (Reichman 1976; Ellickson 1982; Hughes & Turnbull 1996).(Private covenants can prohibit activities that zoning permits, but covenantscannot permit owners to undertake activities than zoning prohibits on theirland.)

Ellickson's 1991 book on the ways that extra-legal activity and informalnorms govern small-area relations is also useful in considering justificationsfor zoning. His finding that small-area groups often choose to deal withneighborhood effects by using home-grown remedies even when the law isavailable should shake economists' unthinking acceptance of the idea thatformal laws actually govern people's behavior. (See also Rudel 1989. ) Severalhistorical studies have also shown that pre-zoning land use patterns do notdiffer much from those that developed after the 1920s, when zoning becamewidespread (Cappell 1991, Warner 1962, McMillen & McDonald 1993).

In order to justify zoning on efficiency grounds, one might look to a largerland-area than the immediate neighborhood of a given property. The theoryof nonconvexities suggests that land developers might overlook value-maximizing opportunities even though they are able to bargain with immediateneighbors to internalize spillover costs (Crone 1983). Nonconvexities cause anumber of local land-value peaks that individual developers might easilymistake for the global maximum. I have pointed out, however, that privatedevelopers are capable of building large-scale communities and are willing toaccept neighborhood spillovers in order to maximize aggregate land values(Fischel 1994). Nonconvexities are a good reason for employing intelligentland-use planners to see the larger picture, but such planners could beemployed by private developers as well as by government bodies.

It must be conceded, however, that most American communities aredeveloped piecemeal by numerous developers who seldom coordinate theirefforts beyond their immediate neighborhoods. To the extent that such lack ofcoordination may be corrected by public zoning, the nonconvexitiesargument may be the most important rationale for zoning. Some historians ofAmerican cities have emphasized that municipalities have long been thevehicle for entrepreneurial development schemes (Monkkonen 1988), andmodern urban economics has emphasized how cities create agglomerationeconomies in which government direction may be important (Henderson 1988;Jacobs 1969). Nonetheless, the link between zoning and "solving" thenonconvexity problem is not thoroughly explored, and the evidence ongrowth controls (section 7 below) suggests that some forms of zoning maywork against efficient metropolitan development.

5. Rezoning Transactions Are Facilitated by Exactions

If development-minded landowners value a rezoning (usually for a moreintensive use) more than the municipal voters (or whoever controls thepolitical process) value the parcel's current zoning, economists would expectthat an exchange would make both parties better off. Developers wouldsimply pay the community a sum that could be put in the municipal treasuryand used to reduce local taxes or spent on additional public services.Hostility to such seemingly Pareto-improving moves is nonethelesswidespread (D. Mills 1989). This section will describe the subterfuges thatfacilitate zoning deals.

Some early zoning laws in fact allowed for private trades of zoning. Theyspecifically permitted zoning changes (or at least zoning variances) if thelandowner got the consent of all or nearly all of the neighbors to theproperty. The U.S. Supreme Court struck down private dealmaking, however,in Seattle Title Trust Co. v. Roberge, 278 U.S. 116 (1928).

Robert Nelson (1977) advanced a reform of zoning as a neighborhoodentitlement that would explicitly permit its sale to developers byneighborhood groups. I have advocated increased fungibility of zoning, withthe sales going to the municipal treasury (Fischel 1985). Members of theplanning profession are typically puzzled or horrified by this idea, but in factmany courts tolerate municipal dealmaking if it is not too blatant (Wegner1987). Informal dealmaking at the neighborhood level is a feature of manylarge-scale projects, and developers' advisory organizations such as theUrban Land Institute offer guidance for negotiating with neighborhoodgroups and environmental organizations (Levitt & Kirlin 1985).

Dealmaking for rezoning is normally carried on at the municipal level. Butthere is lingering hostility to such transactions by the judiciary. Courts maystrike down straightforward exchanges on the grounds that the police powermust be inalienable (Andres v. Village of Flossmore, 304 N.E.2d 700 [Ill. 1973];Kmiec 1982). The California courts have likewise been unwilling to enforcedeals on which communities subsequently reneged (often as the result of avoter initiative). Subsequent California legislation permitting "DeveloperAgreements" has, however, apparently met most of the judicial objections tolimiting the police power over time (Porter & Marsh 1989).

The more subtle inducements to rezonings are called exactions.Developers whose projects are larger than a few units are routinely requiredto pay for new public infrastructure that benefits their projects. (This paymentis often overlooked by critics who regard municipal provision of services tosuburban development as a subsidy.) Although exactions were traditionallylimited to highly localized costs, modern courts have expanded the range ofservices that developers may be required to pay for or provide directly. (The"impact fee" is a somewhat more regularized form of exaction, but the borderthat separates the terms is imprecise.)

Exactions have received substantial attention in the scholarly literature. Awell-rounded review is Altshuler & Gómez-Ibáñez (1993), and a collection ofessays is Babcock (1987). Whether exactions themselves restrict the supplyof housing within a municipality by imposing additional entrance fees, as iscommonly alleged, is not entirely clear. On the one hand, the prospect oflucrative exactions may persuade a restrictive community to allowdevelopment that it would otherwise have excluded (Gyourko 1991).

On the other hand, the lure of filling municipal coffers might induce anotherwise prodevelopment community to adopt regulations just for the sakeof exchanging them for exactions (Sterk 1988). The example is notfanciful--the Mayor of New York once proposed just that, but the plan wasoverturned by Municipal Art Society v. New York, 522 N.Y.S. 2d 800 (Supr.Ct. 1987). It is the latter possibility that seems to make American courtsuneasy about exactions. The U.S. Supreme Court in Dolan v. City of Tigard,114 S.Ct. 2309 (1994), attempted to limit exactions to the public costsattributable to the private project rather than allow the municipality to set theterms of trade. Whether this rule will actually benefit developers remains to beseen.

Issues of horizontal equity raised in the law and economics literature byEllickson (1977) and Been (1991) do not categorically condemn exactions.Land-tax enthusiasts in the Henry George tradition favor exactions as a partialmeasure towards their goal off collective control of natural resources(Tideman 1988), but the fairness of such selective taxation is questioned byothers (Epstein 1993; Levine 1994). Donald Hagman's balanced "windfalls forwipeouts" proposal, which would require exactions when rezoning favoredowners and compensation when rezoning penalized owners, is still worthserious attention (Hagman & Miscynski 1978).

A further form of exchange of zoning are barter arrangements called"Transferable Development Rights" or TDRs. Instead of the communityproffering development rights in exchange for the developer's cash, thelandowner is offered the right to develop elsewhere in exchange for accedingto new restrictions on her property. Because they amount to barter-likeexactions, TDRs are in principle efficiency enhancing, at least when comparedto an inalienable zoning regime (D. Mills 1980; Carpenter & Heffley 1982).

When historic preservation was a young idea, many attorneys believedthat the courts would require compensation for owners of property who wereburdened by the restriction, and Transferable Development Rights wereadvanced as a low-budget means of compensation (Costonis 1974). As thecase law developed, however, landmark designations have seldom requiredcompensation (Penn Central Transportation Co. v. New York City, 438 U.S.104 [1978].) TDRs have languished as a result, with only a few unusuallyrestrictive agricultural and historic-district zoning schemes offering TDRs tolandowners.

A final (but not the only remaining) means of exchange of zoning isthrough the property tax system. Developers of commercial property oftenpoint to the additional property tax revenue that the community will gain iftheir projects are allowed to proceed. To the extent that such revenues exceedthe cost of services occasioned by such development, excess property taxrevenues can be viewed as a side payment by which the community can becompensated for the local disamenities of commercial development (Fischel1975; McHone 1986). The promise of increased employment and wages canalso be a method by which developers persuade officials to make favorablerezonings, though this method works only when the community isgeographically large enough or isolated enough to internalize much of thepotential labor market.

My judgment is that, on the whole, sales of development rights areubiquitous, but they involve higher transaction costs than the sale of othermunicipal assets. Communities that want to sell redundant school buildingsmay have a slightly harder time doing so than otherwise similar privateentities. The variety of opinions by voters and other political interests addsto the transaction costs. But such transactions nonetheless occur regularlybecause of the obvious opportunity cost of failing to do so, and because fewpeople regard selling an old school building as antithetical to the purpose ofschooling. Zoning transactions do occur, but only after overcoming theadditional transaction costs of hostility to the very idea by many citizens,public officials, judges and professional planners.

Exchanges of zoning probably happen often enough to lend credence tovarious studies that suggest that zoning "follows the market" (Wallace 1988;McMillen & McDonald 1991; Wheaton 1993).But following the market byallowing exchange is not the same thing as saying that the land market wouldbe the same in the absence of zoning. Even under highly fungible zoning,communities would withhold those land use entitlements that theycollectively valued more than developers did. As will be argued in section 7below, such a collective entitlement can also have an important effect on realproperty markets via the endowment effect.

6. The Tiebout Model with Zoning Makes Local Taxes More Efficient

Land use controls in the U.S. are regarded as a necessary condition for themodel of local government embraced by the economics profession. CharlesTiebout (1956) suggested that the free-rider problem could be overcome forpublic goods that are confined to small geographic areas. For local publicgoods, Tiebout argued that preferences could be truly revealed if householdscould select among many geographically contiguous communities assumedto provide a wide range of public services. Because most large U.S.metropolitan areasÑin which most Americans live--have scores if nothundreds of municipalities, and because most people move several timesduring their lives, American cities approximate the necessary conditions forTiebout's model.

Bruce Hamilton (1975, 1976) added the local property tax and "fiscal"zoning to Tiebout's model. A criticism of Tiebout holds that the property taxsystem--the mainstay of American local government--encouragesdevelopers to build low-value housing in communities with high levels ofpublic services. This creates two kinds of deadweight loss. The property taxitself discourages housing consumption, since a larger house increases one'stax bill but usually not one's benefits from public services. Second,willingness to pay for local services is not accurately revealed, since somelow-demand immigrants can receive higher levels of local services than theyare willing to pay for in property taxes. As a result, the Tiebout model'sefficiency advantages are undermined.

Hamilton showed that both of these inefficiencies could be overcome ifthe original residents (or developers) of the community established a zoningregime that required subsequent development to generate property taxrevenues that covered each household's expected cost of local publicservices. Such zoning is called "fiscal zoning," though it is empiricallyindistinguishable from any other brand (Bogart 1993). In the Tiebout-Hamilton system, the property tax has no deadweight loss, and the level ofpublic services is efficient, because mobility by households amongcommunities allows them to choose a known level of public services forwhich they must pay. Mobility allows households to choose the mix ofservices and housing they prefer and also encourages communities to keepcosts down (Martinez-Vazquez & Sjoquist 1988).

In proposing this model, Hamilton implicitly embraced the view of zoningas a municipal property right. Economists often view the local governmentfisc in the same terms as the national fisc. Levels of spending and taxes are, inthe conventional view, determined by an entirely political process. But in theTiebout-Hamilton world, local governments are much different; they mustrespond as purveyors of public services to the regional property market. AsWallace Oates (1969) first showed, if local governments provide high-qualitylocal services at a lower level of property taxes--that is, if they operate likeefficient firms--they reward their established residents with higher owner-occupied housing values. (Oates's study has been replicated many times; asurvey and additional evidence on capitalization of local fiscal variables inhome values is Yinger et al. 1988).

The same incentive that homeowner-voters have for supporting efficientlevels of taxes and spending--maximizing the value of their own homes--alsoinfluences their support for local zoning. Zoning laws (and changes inzoning) that increase resident homeowners' net worth will be favored,assuming residents control the local political process, and policies thatdecrease it will be opposed. Zoning is also a means of controlling othermunicipal costs by limiting the types of development that may raise taxes orrequire public expenditures (Oates 1977).

There is ample evidence that owner-occupied housing in well-plannedcommunities is more valuable than similar units in poorly controlled areas. Forexample, Lafferty & Frech (1978) found that suburban communities in theBoston area that kept their commercial areas within closely contiguous zonesrather than letting them scatter about had higher single-family home values.(See also Burnell [1985].) Janet Furman Speyrer (1989) found that housesprotected either by covenants or by zoning in the Houston, Texas, area weremore valuable than houses in sections of Houston that were both unzonedand uncovenanted. (Sprawling Houston, which is unzoned and has areas inwhich covenants have lapsed or were never established, surrounds two smallcities that do have zoning.)

The fact that more stringent zoning restrictions can increase housingvalues raises the question of why all communities do not zone to the mostrestrictive degree possible. One reason is that zoning may be sufficientlyfungible that homeowners can be compensated for devaluations of theirproperty. Suppose a proposed office building is opposed by nearbyhomeowners, who credibly complain that their property will be devalued bythe traffic, the building's shadow, and other spillovers (Thibodeau 1990). Ifthe developer can compensate them with cash or in-kind payments, theexisting residents may "take the money and run," leaving behind houses thatare devalued but neighborhoods whose aggregate property values (for bothhousing and office buildings) are higher. Thus the finding that spilloversdevalue nearby housing is consistent with efficient land use.

The implication of the foregoing is that the efficiency of land use controlsis best evaluated by looking at aggregate land values, not simply owner-occupied houses (Lind 1973; Sonstelie & Portney 1978; Brueckner 1990). Buteven this standard must be qualified. If the municipality possesses somemonopoly power (vis-a-vis other communities) in its provision of developableland, maximization of aggregate land value may be inconsistent with Paretoefficiency (M. White 1975; Pines & Weiss 1976). While there is empiricalevidence in support of the "monopoly zoning" hypothesis (L. Rose 1989;Thorson 1996; Bates 1993), it is nonetheless impressive how many localjurisdictions there are in U.S. metropolitan areas (Fischel 1981). At any rate,Congress in 1984 specifically exempted local governments from financialliability under the Sherman Act, thus stanching anti-monopoly litigationagainst municipalities (Deutsch & Butler 1987).

7. Growth Controls and Endowment Effects Raise Housing Costs

The positive connection between zoning restrictions and housing prices(often pejoratively characterized as "housing affordability") is often raised asa criticism of zoning (Schwartz, Hansen & Green 1981; Katz & Rosen 1987).Critics often point to the delays and cost-creating regulations involved inzoning. Such criticisms overlook that privately-planned communities oftenimpose at least as many barriers to additional housing units and otherchanges in the status quo (Reichman 1976). Moreover, as noted in section 7above, a benign residential zoning policy that makes the community moreattractive would raise the rental price and the purchase price of both pre-existing and newly built housing units.

The foregoing optimistic view of zoning's effect on housing prices mustbe tempered by two observations. One is the previously mentionedmonopoly possibilities. But even in areas with numerous local governments,it appears that local zoning laws can increase housing prices of entiremetropolitan areas (Black & Hoben 1985; Pollakowski & Wachter 1990). It isalso arguable that California's local growth controls contributed to that state'sextraordinary housing price rise that began in the 1970s (Frieden 1979;Ellickson 1982; Fischel 1995). Monopoly and public-sector efficiency cannotbe the only reasons for the higher costs of housing associated with growthcontrols.

In order to explain how a competitive system of local government mightcause inefficiently high housing prices, it is useful to start with the Coasetheorem's framework. If transaction costs are zero and the effect of initialentitlements on each party's willingness to pay (the endowment effect) maybe neglected, Coase pointed out that it does not matter who possesses theinitial entitlement. In the case of the owner of undeveloped land (landowner)versus the existing residents (community), the Coase theorem says thefollowing: It does not matter whether the landowner has the right to erect 100units of housing or the community has the right to keep it in open space (zerounits). If only 60 units of housing are optimal, the community (assumed tospeak with one voice here) will pay the landowner to refrain from building 40of them if the landowner has the right to build. If the landowner lacks theright to build, she will pay the community for the right to erect 60 houses (butnot 61 or more). (This idea is developed graphically in Fischel 1985)

Coase set out this theory in order to induce economists to investigate theconsequences of dropping the assumption of zero transaction costs. Asmentioned in section 5 above, there are more-than-normal transaction costsinvolved in developers' purchasing rezonings. As a result, fewer than 60housing units might end up being developed. Transaction costs act in thisinstance the same as an excise tax on housing. If this condition applies to allcommunities in the metropolitan area (as it normally would), housing priceswill be higher than otherwise, even if there is no municipal monopoly power.

The "higher than otherwise" needs some qualification, however. It cannotreasonably mean that housing prices are higher than they would be if therewere no land use controls at all. In that case, the owner in the example mightend up putting up too many houses (more than 60) because the community isunable to organize to purchase the 40 development rights. That is, one mustconsider the effect of transaction costs on the other side. One might, as inmuch blackboard law-and-economics, suppose that some third party can(without cost) determine what the optimum would have been in the absenceof transaction costs, but that supposition hardly addresses issues in whichtransaction costs are pervasive.

A better way to think about the appropriate benchmark for determiningwhether zoning is too restrictive (and thus housing too expensive) is to askwhether another system of law could provide much the same benefits ofzoning with fewer of the costs. The "comparative systems" approach wasrecommended by Demsetz (1969), and its chief practitioner in the land-usearea is Robert Ellickson, as mentioned in section 4 above.

Aside from focusing research on the effects of transaction costs, theCoase theorem also raises the issue of the "endowment effect." (Coasehimself brushed this aside.) Even if transaction costs are zero, which partyhas the initial endowment--the development-minded landowner or the anti-development community--might still make a difference in final equilibriumbecause having the initial endowment affects their subsequent willingness toexchange. Economists have traditionally considered initial endowments asamounting to the same thing as income or wealth elasticity of demand. Thatis, if the community is entitled to restrict the landowner's development, theexisting residents are richer than they would be if they had to pay thelandowner (out of increased property taxes, say) to forswear development.

But this effect does not explain much. It can only work when theentitlements are first established. The owners of land favorably affected byzoning got a capital gain when it was first adopted, or, more precisely, when itwas first known that it would be adopted and expected to last. Subsequentbuyers had to pay more for the land as a result. New occupants of houses inrestrictively zoned communities have to pay for the initial entitlement inmaking their purchase, leaving them no richer than if there had been nofavorable zoning to begin with.

A more likely explanation for the reluctance to trade induced by theendowment effect is the "offer/ask" disparity, which appears to existindependent of the amount of wealth (Hoffman & Spitzer 1993). Manypsychological experiments indicate that possession--in either a physicalsense or from longtime usage--of an entitlement leads people to value it morethan they would if they did not initially own it. The initial entitlement effectleads to disparities between willingness to pay (or "offer") and willingness toaccept (or "ask") on the order of at least 1:1.5 and often 1:5 and higher(Knetsch & Sinden 1984). The high-side disparities are especially pronouncedwhen public goods, such as neighborhood amenities, are the subject of theexperiments (Knetsch 1990).

In light of the evidence on the endowment effect, it seems likely thatcommunity possession of the entitlement to develop should result insubsequent trades that are far more restrictive of development than iflandowners had to be persuaded not to develop. The greater restrictivenesscaused by the endowment effect cannot be considered inefficient by theusual economics standard. Pareto efficiency can be achieved for any initialdistribution of wealth. The fact that there is more than one efficient outcomein the land use game is no more remarkable than that there are many points ona contract curve in an Edgeworth box.

It is for this reason that economists cannot simply say that the restrictivezoning and resulting higher housing prices are inefficient. One could stepback to challenge the legitimacy of the transfer of development rights fromnominal owners to the community (Epstein 1985). This is problematic,however, given the large number of historically involuntary transfers(especially involving land) that are now regarded as legitimate, and given thatthere was never an age or a place in which private landowners had theuntrammeled right to develop as they pleased (Ellickson 1993). Zoning is onlya recent stage in governmental restrictions on land use, and it has beenwidespread for more than 70 years.

One way out of this box for economists is to invoke the contractarianapproach of Buchanan & Tullock (1962) and John Rawls 1972. Their approachallows economists to consider the distribution of initial entitlements ratherthan just the opportunities for exchange. It assumes a "veil of ignorance" inwhich the people affected by zoning are to make rules about its operationwithout knowing what their position will be after the "veil" is lifted and theygo about their business. Thus persons making decisions about the properdistribution of entitlements do not know whether they will be landowners,initial community residents, or later community residents who would arriveafter the zoning laws are established. (This mirror's one of Frank Michelman's[1967] approaches to the question of just compensation, to which Fischel &Shapiro [1989] applied a formal economic model)

The people at this convention would balance the benefits of having anice, low-density community against the benefits of being able to purchasehousing in the same community at a reasonable cost. They would do thisbecause they face a risk of being outsiders to the community (and thus haveto pay more for housing) as well as being insiders to the community (andthus worry about preserving residential amenities). They might also beconcerned that they would end up being owners of undeveloped land, whichwould induce them to ask themselves whether it is fair for them to bear mostof the cost of providing the benefits of a low-density community. Thisinvocation of the Golden Rule offers only a starting point for evaluatingquestions about land use, but it at least avoids arguments about the "originalintent" of the millions of people whose formal and informal actions overhundreds of years crafted today's property regimes.

8. Decentralized Zoning Can Cause Metropolitan Sprawl

Behind the question of whether zoning is "justified" on efficiency grounds isthe question of why spatial proximity matters for the economy. Zoning wouldbe both unnecessary and uncontroversial if all sites had close substitutes.People dissatisfied with neighborhood conditions would just move, anddevelopers shut out of a site by zoning would yawn and go to the nextcommunity. Both of these are not what one observes at zoning hearings, andso economists of the law and economics persuasion should understand someprinciples of urban economics. (Urban economics texts that also discusszoning are Mills & Hamilton 1993 and O'Sullivan 1995.)

The first is a geography lesson. Urban activities, which account for mostof the value-added in the economy, occupy only a tiny fraction of the landarea of the United States. Less than five percent of the forty-eight contiguousUnited States' land area is urbanized by even the most generous definition of"urban," which includes urban parks, commercial activity, factories and thetransportation network as well as house lots (Fischel 1982). If Americans feelcrowded, it is because they seem to prefer crowded places to the 95 percentof the country that is barely occupied.

The concentration of capital and labor on a small land area defies the lawof diminishing returns in that urban wages are higher than rural wages, andwages in larger cities are higher than in smaller cities. Firms and otheremployers can pay higher wages only if there are some agglomerationeconomies that offset the higher costs. Agglomeration economiesÑthe higherproductivity of conducting business in close physical proximity to otherbusinessesÑare the reason that cities exist and, arguably, the reason thatmodern economies are productive.

The impact of zoning on urban agglomeration economies is necessarilyambiguous. In an optimistic view, zoning can be seen as a means by whichcity dwellers reduce the public diseconomies of crowding while maintainingrelatively high concentrations of housing and businesses. Zoning may be theleast costlyÑin terms of minimizing efficiency losses from location conflictsplus administrative costsÑmeans of dealing with urban disamenities. If this isso, then cities and the nations composed of well-zoned cities can becomeeven more productive than they would be.

Making cities more livable attracts more people to live in them and allowsfor even higher densities, thus taking greater advantage of agglomerationeconomies (Henderson 1974). In this sense, zoning is just like an effectivesewer system, which allows for larger cities by making high densitieshealthier and more amenable. Zoning in this light is simply a public good-housekeeping rule: A place for everything, but everything in its place. (Butsee the arguments that alternative systems might work better, discussed insection 4 above.)

The less optimistic view holds that zoning does its job of separating"incompatible" uses too well. The modern enthusiasm (since circa 1970) for"growth controls" is an example. Growth controls employ zoning powers torestrict the overall development of the community rather than to channeldevelopment to particular zones. The supposedly incompatible uses--whichoften include new housing much like that occupied by the majority of existingresidents--are excluded entirely from the municipal boundaries. Because ofthe multiplicity of zoning instruments and the amount of discretion involved,it is difficult to distinguish a "growth control" ordinance from a "goodhousekeeping" ordinance. Nonetheless, the qualitative distinction remainsclear to most participants.

Laws that discourage all development would seem self-destructive if theywere adopted by entire metropolitan areas. This may explain why such lawsare seldom seen on a statewide basis. Discouraging development has highpolitical costs because of reduced employment, wages, and state taxrevenues. Most American metropolitan areas are, however, composed ofmany municipalities, each of which can adopt its own zoning laws. One seessome municipalities adopt growth controls while others either do not orpositively encourage growth (Dowall 1984). The net effects are not obvious.Development discouraged in one municipality can end up in another part ofthe same metropolitan area. The general pattern of land use may beunchanged, and, given the Tiebout-driven heterogeneity of tastes amongcommunities, the patchwork may be tolerably efficient.

Despite the foregoing concession to institutional self-ordering, I believethat zoning, at least the growth control variety, has a distinct and (I say withless confidence) deleterious effect on the larger economy (Fischel 1990).Growth controls are most popular among high-income suburban homeowners(Ellickson 1977; Dubin, Kiewit & Noussair 1992). The peculiar pattern ofdevelopment of modern American cities puts high-income people farthestaway from the traditional central city. The uniformity of the "noose" of high-income suburbs around the central city has been exaggerated, but it isnonetheless a perceptible phenomenon.

Because the majority of homeowner-voters in fragmented metropolitanareas work in other communities, they do not perceive a employment-cost toadopting growth controls. This gives rise to a prisoners' dilemma: Even ifsuburbanites were concerned that the sum of local growth controls harm theeconomic health of the metropolitan area and threaten their own jobs, theywould be foolish to make the "cooperative" move and relax their own zoningstandards. The flood of development would overwhelm their communitywhile nearby municipalities took the gains (higher wages, more jobs) withoutbearing the costs.

The net result of suburban slow-growth policies is that residential andcommercial development is forced somewhere else. Although central cities aresometimes eager to take what the suburbs do not want, the jilted developersmore often prefer a location with less crime, congestion, and corruption. As aresult, the development heads to more rural locations, though still arguably inthe metropolitan area. The net result of growth controls, I submit, is suburbansprawl. (For theoretical urban models that obtain this result, see Moss 1977,Sheppard 1988, and Turnbull 1991)

Suburban sprawl has been so overblown in the academic planningliterature, much of which seems to cast all suburban development aspresumptively-excessive sprawl, that economists are apt to discount itentirely. American cities began suburbanizing well before zoning was infashion, and suburbanization is a worldwide phenomenon. The belief thatland use controls can reverse this trend so as to march businesses back to asingle central district and herd commuters into subway cars can charitably bedescribed as naive.

Nonetheless, there is evidence that American cities are more suburbanizedthan those in otherwise comparable countries, including Canada(Mieszkowski & Mills 1993). The suburbanization gap cannot be entirelyaccounted for by America's subsidies to housing (obtainable in high- as wellas low-density configurations), its higher income (not so much higher), orlarge stock of land. Farmland value, not the stock of land itself, is the morerelevant economic constraint on the outward edge of suburbanization(Brueckner & Fansler 1983).

America's freer land market leads to speculation, but that should lead tohigher densities, not to lower density "sprawl" (Ohls & Pines 1975; D. Mills1981). Speculators buy up land at the urban fringe well in advance ofdevelopment. They decline to sell to initial developers with low-density plansand wait until higher-density uses materialize. This creates a pattern ofleapfrog development followed by higher-density infill, with the long-runresult directing higher-density uses closer to city centers (Peiser 1989).

Simply to say that American cities are more sprawling is not to say thatlocal zoning-induced sprawl is inefficient. It could be that other nations'metropolitan areas are inefficiently dense as a result of national land-usepolicies (Hannah, Kim & Mills 1993; Mayo & Sheppard 1996). What leads meto the suspicion of sprawl's inefficiency is that numerous studies have foundthat the instruments of low-density zoning cause substantial losses toowners of undeveloped land (J. White 1988; Brownstone & Devany 1991).Only a few have attempted to compare these losses to the gains thatsimultaneously accrue to owners of previously-developed land (Frech &Lafferty 1979), but there are no cases in which the apparent gains exceed thelosses. Given that localized net benefits of public activity should to someextent appear in urban land values, there is reason to suspect that Americangrowth controls are inefficient.

In attempting to explain this alleged inefficiency, one must look at somelarger issues that distinguish American cities (here to mean metropolitan area)from those of the rest of the world. The distinctive differences are Americancities' more fragmented government, their higher violent crime rates, and,compared to most developed nations, the wider variation in income, mostprobably associated with America's history of racial inequality.

High-density housing (especially publicly financed housing) andcommercial development are widely associated in the public mind with highercrime rates, higher taxes, and lower quality public services, all of which lowerthe value of existing owner-occupied housing. While many courts andstatewide policies are hostile to selective exclusion of the poor (Haar 1996),they usually look benignly on general exclusion in the name of open space,small town character, and farmland and wetland preservation. Rationalsuburbs have embraced the latter causes to help pull up the drawbridge. Thefrequent local alliance between promoters of farmland preservation andenvironmental protectionÑthe former activity usually less tolerant of speciesdiversity than a typical housing subdivision--may be accounted for by theirjoint effect of forestalling development and preservation of open space.

The success of exclusionary policies in turn encourages the maintenanceof local government fragmentation. There have been many studies that havedecried the inequalities that suburban fragmentation brings. Their authors,most notably Anthony Downs (1973; 1994), have proposed policies thatwould reduce the fragmentation of metropolitan governance. But iffragmentation is the result of rational concern about crime and the quality ofpublic services by a majority of voters, it seems unlikely that such reformswill succeed.

I think that anxiety about crime and related social disorder is the mostpowerful reason for excluding growth (Skogan 1990; Cullen & Levitt). Policiesthat have made local services and property taxes more uniform--especiallyCalifornia's Serrano decisions and Proposition 13--have not produced anyapparent reduction in suburban exclusivity. If a "first cause" of suburbanexclusiveness could be identified, I would suppose it to be anxiety aboutcrime and related public disorderliness.

The consequences of excessive decentralization are widely regarded asinvolving excessive commuting and the external effects that come withautomobile traffic. Evidence suggests, however, that automobile commutinghas not risen much, largely because employment has become nearly assuburbanized as residences (Gordon, Kumar & Richardson 1989). Butdecentralization of firms may itself have adverse effects. On a distributionallevel, it may make it more difficult for members of minority groups, who mayfind it more difficult to purchase residences in the suburbs, to findemployment (Gabriel & Rosenthal 1996). On an efficiency level, excessivedecentralization of firms may reduce the agglomeration economies that makecities productive places. Changes in communications technology may bemaking such agglomeration economies less important, so it is difficult toevaluate the extent to which decentralization, whatever its cause, isinefficient.

9. Localism Trades Environmental Quality for Fiscal Benefits

The previous section addressed concerns that local zoning is too restrictiveof development, especially in limiting the extent and type of housing. Butthere is another group of critics who have argued that zoning is notrestrictive enough. Advocates of environmental protection expressexasperation with local decisions that permit developments whose adverseeffects spill over to the rest of the region (Reilly 1973). This gives rise to atleast two issues.

The first has it that competition among municipalities for commercial andindustrial property will create a "race to the bottom" in environmental quality,causing the environment of both the community and its region to bedegraded. The second issue concerns itself with relations between thecommunity and its immediate neighbors. It is commonly asserted thatcommunities pursue a "beggar thy neighbor" policy by zoning land onmunicipal borders for such unlovely uses as landfills, shopping centers,sewage plants, and industrial parks. Because such policies may inviteretaliation, the story goes, "beggar they neighbor" also reduces the quality ofthe regional environment. I shall treat them in reverse order.

The ratio of evidence to assertion of the beggar-thy-neighbor idea isremarkably small. Sewage plants are, by casual observation, often close tomunicipal borders, but that is most likely because water runs downhill. Theleast costly place to put such a plant is at the lowest point in the community,and that is often the point at which a river leaves the jurisdiction and entersanother. (As I tell my undergraduates, if it were practicable to requiremunicipalities to take in drinking water downstream and release sewage in thesame river upstream, each community would have the optimal incentives totreat its sewage. For less fanciful, common-law approaches to disputes amongmunicipal neighbors, see Ellickson (1979).) But it is worth unpacking thisproposition because of the light it may shed on intercommunity relations andtheir consequences for environmental issues.

Imposing unilateral costs on one's immediate, permanent neighbors isperhaps one of the least profitable activities in the world, as any homeownerknows. The reason is that one has to live for a long time with such neighbors,and, over the long run, there will be many opportunities for the neighbor toretaliate. The retaliation at the municipal level could be unfavorable treatmentalong other borders, but it more likely would be lack of cooperation in otherintermunicipal activities. They include mutual aid agreements for fire andpolice protection, cooperation for specialized school programs, andcoordination of regional development activities.

This does not mean that all intermunicipal spillover will be internalized bya self-interested spirit of neighborliness. But self-interested neighborliness isobserved often enough in other activities that it would be strange to rule itcompletely out in the municipal land-use context. Where one would expect itnot to succeed is when the costs can be imposed on a highly diffuse andremote group of communities. Upper-atmosphere and large-river pollutionwould not necessarily rise to being an affront to one's immediate neighbors.But hardly anyone disputes the idea that such spillovers require the attentionof larger-area governments, and that most of the controls should be aimed atthe activity that gives rise to the pollution, not the specific location of thepolluter.

The "race to the bottom" claim is a more common and more importantcriticism of local land-use autonomy (Esty 1997). There is little doubt, as anempirical matter, that municipalities do seek to have commerce and industrylocate within their borders in order to promote local employment and improvethe local tax base (usually property taxes). Because many communities do so,it is likely that some of the competition takes the form of relaxedenvironmental standards, if one understands such standards to include allconceivable infringements on residential amenities.

Much of the criticism of this process comes from those who at least assertthat any public sacrifice of environmental quality in exchange for other goodsis unacceptable. It is generally agreed that some forms of exchange aredesirable and that the presumption of a catastrophic "race" to anenvironmental Armageddon is not warranted (Oates & Schwab 1988; Revesz1992). But less extreme criticisms of regulatory federalism are possible . Themore plausible anxieties focus on failures of the local political process tovalue the foregone amenities (Esty 1997). Within the homeowner-dominatedcommunity, one would expect that amenities would be capitalized in the valueof homes. Lower property taxes (or other ongoing fiscal benefits from firms)increase their home values, but the disamenities of firms that pay the extrataxes would tend to lower them.

Several theories hold that this trade-off provides efficient incentives in thehomogenous homeowner community in which the median voter prevails(Fischel 1975; Fox 1978). The implication of this view is, incidentally, thatmost "property rich" communities have in fact paid for the fiscal benefits ofan industrial tax base in foregone amenities; the larger tax-base is not awindfall. This does not mean, of course, that homebuyers in suchcommunities received no gains from the exchange, only that redistribution oftax bases would cause some regret (and capital losses) among communitiesthat had been willing to accommodate industrial uses (Gurwitz 1980; Ladd1976).

All of this is not to suggest that there are no asymmetries in the localprocess. Voters who are renters might be indifferent to improvementscaptured in property values, so they might be more inclined to vote for land-use policies that increased their wages even if property values shrank. (Thiscould be partly offset by rent control, which gives renters a stake in propertyvalue changes.) On the other hand, compensatory payments by firms may beinhibited by the transaction costs of working through the public sector, thusbiasing the result towards a residential status quo.

The more troubling issue in this vein is the charge of "environmentalracism" (Been 1993). The charge is that communities with minoritypopulations are forced to endure disproportionately large amounts ofunpleasant commercial and industrial development. The evidence for this istypically that the poor, who are disproportionately minority-group membersin the U.S., are more often close neighbors to commercial and industrialdevelopment than the rich. The larger question is whether this is the result ofa political process that is biased against the poor generally and minoritiesspecifically.

The difficulty with the environmental-injustice charge is that evidence ofit hinges on a particular historical sequence of events. Some sequenceswould seem benign. Vicki Been (1994) developed evidence that low-incomeand minority households establish residence near waste incinerators afterthey have been establishedÑthey moved to the pre-existing nuisance. Buthow did the "nuisance" get placed there in the first place? Was it forced uponlocal governments or did the locals actually invite it for tax or employmentreasons?

It is known that low-income communities are often more willing toaccept--not forced to accept--fiscal and employment benefits in exchangefor permission to develop commercial and industrial properties (Fischel 1979).This means that poor communities, which often have disproportionately largeminority population, would, under a median voter model, end up withdisproportionately large amounts of unpleasant commercial and industrialdevelopment. They would get it because they wanted the fiscal andemployment benefits. (The lower participation rate of low-income voters inthe local political process does, however, raise the question of whethersilence means consent.)

Within larger, more heterogeneous municipalities, the issue would seem toturn on the efficacy of logrolling and neighborhood representation in sitingunwelcome but necessary uses. One could imagine a process in whichmutually advantageous logrolling results in industrial development largely inthe low income areas whose residents value the employment benefits more.Less optimistically, one could also imagine underrepresented minority areasgetting the short end of the stick, all of the costs without much benefit. Hinds& Ordway (1986) found that commercial rezonings, often not desired byresidential neighbors, were once more likely to occur in black districts inAtlanta than in predominately white districts. They noted, however, that thedisparity was eliminated once black neighborhoods were better representedon city council as a result of eliminating at-large elections and adoptingcouncil districts.

10. Conclusion: Municipal Corporations Are Key Institutions

It has been my contention that viewing zoning as a municipal property rightprovides better insights into zoning than other approaches to zoning thatneglect property rights issues. This has been a somewhat one-sided test,though, since I have not explicated other theories. Most other approaches arebased on the principle that externalities in the land market can be corrected bygovernment planners (Pogodzinski & Sass [1990]). The property rightsapproach attempts to unpack that sentence by asking what, precisely,constitutes an externality, and what institutions are best for dealing withconflicts among neighbors, whether they be adjacent property owners orcities and their suburbs.

The development of a law-and-economics approach to land use controlshas been hampered by scholarly neglect of the role of the municipalcorporation, which is in contrast to the vast literature on private corporations.Many law-and-economics treatments of land use proceed as if the nature ofthe problem were private, as between two adjacent landowners, and the onlyrecourse the parties had was to a common-law court that had a choicebetween equitable (injunctive) and legal (damages) remedies (Cooter & Ulen1988, chap. 4). I believe that the private-law focus of mainstream law-and-economics has resulted from the application to practical issues of thetheoretical treatments of the property rule/liability rule issue, which oftenuses land-use disputes as an example (Polinsky 1979; Krier & Schwab 1995).The touchstone of the property rule/liability rule issue is Calabresi &Melamed (1972), who also used land-use conflicts as examples, and the twopre-eminent examples of the distinction are the leading case in nuisance law,Boomer v. Atlantic Cement, 309 N.Y.S.2d 312 (1970), and its forlorn butfascinating cousin, Spur Industries v. Del Webb, 494 P.2d 700 (Ariz. 1972).

Boomer concerned the nuisances of blasting and cement dust that thecement company inflicted on Mr. Boomer and a group of pre-existingneighbors. Spur concerned a smelly Arizona cattle feedlot next to which DelWebb built a retirement city. The legal remediesÑcast as "property rules" and"liability rules"-- in both cases are much discussed in the literature, but suchremedies are in fact almost entirely beside the point in the real world. Thereason is that such uses are subject to zoning in most communities. (Indeed,the Spur court pointed out that Del Webb, the developer of houses adverselyaffected by the feedlot, was less deserving because he had skipped out of thezoned area of Phoenix, and for that reason Del Webb had to pay Spur tomove its feedlot.)

The problems of organization, information gathering, strategic bargaining,decision making and other transaction costs that are said to hobble privatebargaining are in fact almost always channeled through municipalcorporations. The channeling does not "solve" such problems, but it doescast them in a different light for scholars. All municipalities possess thepowers of eminent domain, taxation, and police-power regulation. Almost allof them are subject to democratic governance procedures, and the extent oftheir authority is broad (Ellickson 1982; Briffault 1990). No applied theory ofzoning or discussions of general land-use policies should neglect this long-standing institution.


I am grateful for comments from Dan Esty, Jim Krier, and David Mills.

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© Copyright 1998 William A. Fischel

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