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Literature Review

by Katerina Valtcheva Valtcheva_Katerina_RewrittenLiteratureSurvey

 

I am interested in exploring the efficiencies and inefficiencies of zoning and land use regulation in the U.S. To this end, I will briefly look at the history of zoning and some major events that shaped how it has been exercised. Then I will present the findings of several studies concerning the practice and examine where that leaves us today.

Growth control restrictions and zoning were originally developed as a way to prevent the development of industrial and commercial zones in proximity to residential areas. However, zoning was not largely employed across America until the Standard State Zoning Enabling Act of 1922 was enacted by the U.S. Department of Commerce. Since the adoption of the act, zoning became a widespread practice that has not been significantly affected even by adverse court rulings. As a result, local municipalities have the biggest say in when and where to employ regulations. Since governments have recognized the importance of property value maximization as one of their objectives, zoning has become a way to exclude lower income residents from communities. Theoretically, zoning and growth control restrictions imply that taxes paid for local services are in one to one correspondence with the demand for those services and ensure that no member of society gets services than they have not paid for. (Fishel 1992; Quigley and Rosenthal 2005)

In his paper on property value maximization, Brueckner (1983) builds on Tiebout’s broad idea of governments achieving efficiency in a community by maintaining its population subject to the minimum individual cost of public goods and services. Brueckner’s analysis of governments that engage in property value maximization while allowing for private land and property markets (the effects of this behavior on land rent and house size are ignored), proposes a more concrete application of Tiebout’s original idea.

Brueckner (1983) showed that communities are internally in Pareto-efficient equilibrium when their governments maximize the value of aggregate property by selecting their public good output provided that government revenue is collected by a per-house tax. If the same revenue is being collected with a distortionary tax, such as income tax, the same community will be internally efficient, but not internally Pareto-efficient (it is important to note that the paper did not clearly define an “efficient allocation” as clearly distinct from Pareto efficiency). However, this government strategy of value maximization cannot achieve a globally efficient equilibrium. The reason for this is that in the model the zero-profit utilities between communities will differ depending on the community population and its tastes. The Nash equilibrium of government behavior with respect to maximization of property value ensures the internal Pareto-efficiency mentioned prior; however, it does not always assign community consumers optimally, which leads to global inefficiency. Fischel (1992) runs into similar complications with regards to quantifying zoning efficiency in large areas. However, instead of lack of Pareto-efficiency, he argues that zoning is less effective in large cities rather than in suburbs and rural areas due to the heterogeneity of larger populations’ interests.

Bruckner suggests that a government-applied population control such as zoning could be the key to achieving global efficiency. The reasoning behind his statement is that such restrictions can make the population’s tastes more homogeneous by excluding lower income residents and thus increasing efficiency in communities where taxes are distortionary.  However, the effective introduction of zoning into the model is a problem that has yet to be solved and requires further research. One factor that must be taken into consideration is that studies of zoning and growth regulations have not yet yielded a unanimous and statistically significant proof of such practices’ effectiveness in all areas, or their consequences.

Fischel (1992) claims that even though studying zoning is a challenge given the abilities of governments to amend the laws due to new political environments, it is possible to extract broad conclusions, both because the laws governing the states are similar and because of the effects of the Standard State Zoning Enabling Act of 1922. However, Quigley and Rosenthal (2005) in their paper on the effects of land use regulation argue that the complex interrelationship between demand for housing, availability of public services and conditions for them makes the implementation of an optimal regulatory framework a daunting task for any municipality.

One difficulty that arises when examining the effects of zoning is that numerous purposes of land use and regulatory dimensions exist; however, this is not the only problem with past studies. Methodological problems with various studies include the virtual impossibility of extracting generalizations about large areas. One reason for this is given by differences in standards for measuring land oversight. Other reasons include scarcity of data or not accounting for the fact that regulation and prices are determined endogenously. Moreover, the studies are conducted irregularly, which makes it even more unlikely for a generalization between them to be drawn. (Quigley and Rosenthal, 2005)

Fischel (1992) claims that many studies show that “adoption of more restrictive zoning reduces the value of undeveloped suburban land subject to restrictions and increases the value of already-developed homes.” However, this does not unambiguously prove zoning laws’ effectiveness. Quigley and Rosenthal (2005) examine results from various studies in order to assess what conclusions can be drawn regarding the effectiveness of zoning. Several quoted studies largely failed to demonstrate the effectiveness of monopoly zoning on property values, until an analysis by Thorson (1996) showed promising results. Thorson analyzed reported median home values using more complex models, which included neighborhood and housing quality controls, where his concentration ratio turned out to be significantly related to increased home prices. Other studies restricted to certain areas in the U.S. concluded that zoning has little to no effect on property values. However, some of the later studies that address challenges in existing methodologies confirm the positive effects of zoning on property values. According to Quigley and Rosenthal, a lot of these articles show that regulations of land use raise the value of existing property, but diminish that of developed land, which is the same result at which Fischel arrived. However, Quigley and Rosenthal determine that the overall effect of density regulations on property values is ambiguous. They conclude that it is not possible to make any definite generalizations about the effect of zoning and land use restrictions onto property values, which contrasts with Fischel’s more optimistic view.

It seems that Pareto-efficient equilibrium can be achieved in various communities by the optimization of a public good and thus maximizing property value (Brueckner 1983). This finding provides a partial theoretical solution to one of the problems government have on their agendas, but further research must be done in order to reach a globally Pareto-efficient equilibrium. The way Brueckner proposes this issue to be solved is through the use of zoning. However, there are a lot of unsolved problems that need to be addressed before a global property-value-maximization model can be developed.

 

References:

Quigley, John, and Larry Rosenthal. “The Effects of Land Use Regulation on the Price of Housing: What Do We Know? What Can We Learn?.” Cityscape. 8.1 (2005): 69-137. Web. 7 Feb. 2013.

Fischel, William. “Property Taxation and the Tiebout Model: Evidence for the Benefit View From Zoning and Voting.” Journal of Economic Literature . 30.1 (1992): 171-177. Web. 7 Feb. 2013.

Brueckner, Jan. “Property Value Maximization and Public Sector Efficiency.” Journal of Urban Economics. 14. (1983): 1-15. Print.

Thorson, James. “An Examination of the Monopoly Zoning Hypothesis.” Land Economics. 72.1 (1996): 43-55. Web. 7 Feb. 2013.

 


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