Econ 414 - Urban Economics

# Econ 414 - Urban Economics
## Urban Sprawl and Land Use Regulation
### Marcelino Guerra
### February 18, 2021

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# Motivation

* Between 1970 and 1990, Chicago metropolitan area grew 46% while its population increased by only 4%. The spatial growth is observed in other areas

* What are the causes of the city's spatial expansion? What's wrong with it?

* Market failures x failure of governments to get prices right

* Critics of sprawl argue that suburbanization leads to a loss of amenity benefits from open space, longer commutes, traffic congestion, and air pollution. Besides, that might reduce the incentive for redevelopment of downtown areas

* They also claim that urban sprawl reduces social interaction and the car-based lifestyle increases obesity

* In response to concerns about suburbanization, public policies such as urban growth boundaries are designed to target the spatial expansion of cities

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# Urban sprawl

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# Sprawl before cars

* Sprawl began centuries ago when people started using something other than their own feet to travel (e.g., horse-bus)

* New transportation technology goes through three phases
  - A faster way to move is created and produced in large-scale (if feasible) 
  - New transportation network is built to accommodate this new technology
  - People and companies adapt and take advantage of the latest transport mode changing their geographic location

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# Highways in the 1950s

* By the 1950s, the majority of the American people had a car, and the transportation network had to be expanded to catch up with the rise of cars.
The Federal-Aid Highway Act of 1956 authorized the construction of 41,000 miles of the Interstate Highway System, one of the most extensive public works project in history

* Before that, America had begun to reorganize its cities in response to the automobile: the Federal Highway Act of 1921 provided $75 millions of matching funds for state highway projects

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# Mass-produced housing

* By building thousands of homes in one area, Levitt was able to cut prices - a modern and comfortable house for less than $8,000 in 1950

* At the same time, Federal Government was subsidizing housing, incentivizing home-ownership

* Although access to public transportation was still necessary, suburbs were coming to depend on the car

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# Market failures and urban sprawl

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# Open-space amenities

* Open-space from farmland can generate amenity benefits to people

* That positive externality is not reflected in prices, and that leads to suboptimal use of land

* Suppose each acre of rural land generates `$b$` dollars of open-space benefits

* To get the optimal use of land, one needs to account for that positive externality. In this scenario, the agricultural rent internalizes its social benefit `$r_{A}+b$`

* Now, the boundary of the city is not the `$x$` where `$r=r_{A}$`, but where `$r=r_{A}+b$`

* **The free-market equilibrium is suboptimal in the presence of an open-space amenity**

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# Open-space amenities

* Suppose the landowner has to pay a tax of `$b$` dollars per acre. Then, the after-tax income for the landowner related to the developed land is going to be `$r-b$`

* The landowner switch the land from agricultural to urban when `$r-b \geq r_{A}$`

* The resulting city is smaller. The apartments are smaller `$q \downarrow$`, price per square foot higher `$p \uparrow$`, buildings are taller, and population density higher `$D \uparrow$`

* People have different preferences, and the social benefits are uncertain
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# Traffic congestion

* This negative externality arises because the presence of a single extra car on a congested road slows down everybody else

* Since other drivers felt these congestion costs, no individual driver has the incentive to take them into account

* The private cost of commuting is less than the social cost

* Traffic is also related to other externalities such as pollution

* To correct this externality, commuters should be charged a congestion toll equal to the cost that they impose on other drivers

* When the congestion toll is introduced, commuters will respond to that increase in commuting costs changing their choices

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# Traffic congestion

* By raising commuting costs, there will be a rotation in the housing-price curve

* Residents will move to downtown in response to that. In the new equilibrium, the city shrinks, housing prices in downtown are higher, buildings are taller, and the population density increases at the city center

* The free-market city takes up too much space
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# Land-use controls

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# Urban growth boundaries

* An alternative anti-sprawl instrument is quantity-based rather than price-based, and it is known as urban growth boundaries (UGB)

* In simple terms, a UGB imposes an upper limit on `$\bar{x}$`

* UGBs are common in the U.S. cities, and easier to implement than price-based instruments, addressing the symptom instead of the root cause of sprawl

* Although the UGB can reach the same goal as the development tax `$b$`, there is no guarantee that the population will move downtown. The UGB tends to increase density everywhere

* **A congestion toll achieves this addressing the commuting costs directly**

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# Urban growth boundaries

* The UGB restricts the supply of land for developers

* That would increase `$p$` and `$r$` artificially. The city shrinks, and the land between `$\bar{x}_{0}$` and `$\bar{x}_{1}$` is devoted to agriculture

* Despite the rent loss in that area `$V$` since `$r_{0} \geq r_{A}$`, the landowner would be better off as long as the area `$S$` - the additional rent generated in the urban side - is greater than `$V$`

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# Building-height and density restrictions

.pull-left[
* A number of cities impose a building-height restriction:
  - In Washington, no building can be taller than the U.S. Capitol
  - Central Paris has a few tall buildings
  - Mumbai and Bangalore have developed under tight height restrictions

* When height restrictions are imposed, this supply constraint leads to higher prices and land rent everywhere. People will consume less housing/apartments are smaller. At the city center, buildings are smaller than they would be without the restriction, and population density decreases in downtown. In the outer part of the city, buildings are taller.

* Those people that would otherwise live downtown now are spread over the city. Hence, there will be an increase in its spatial size: building-height restrictions cause urban sprawl

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.caption[
Technically, height restrictions specify a limit on a building's floor area ratio: `$FAR=\cfrac{\text{Floor space in the building } (m^{2})}{\text{Lot Area}}$`.
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# Zoning laws
 
.pull-left[

* Zoning laws specify the allowable type of land use in a given area (e.g., industrial, commercial, multi-family, and single-family residential)

* The goal is to limit the negative externalities separating different land uses

* For instance, a factory that produces pollution and noise near to residential areas

* That negative externality will push housing prices down around the industrial area. Landowners are hurt with lower land rent prices near to factories

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# Zoning laws

.pull-left[ * With factories isolated at the city's edge, for example, the negative externality is reduced, and therefore the rent losses are minimized

* Real-world examples show that zoning may not be essential in every city (Houston).

* In practice, zoning is often motivated by other reasons and is exclusionary in nature
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