Property Rights, Development Rights and Developer Behaviour
According to neoclassical economic theory, when property rights are well defined and enforceable, there will be stronger incentives for individual investment in land. Land use regulations act as an encumbrance on property rights, but also operate to protect land values on surrounding land:
“State restrictions on land use rights are like a double-edged sword. The negative side is that ... they do erode incentives to invest in land, particularly if applied excessively. The positive side, though, is that they minimise erosion of land values on adjoining plots.” (Musole 2009, 3312', p. 56)
Advocates of strong property rights frameworks argue that the externalities arising from development should be internalised as much as possible. In other words, that a well-defined property rights system allows markets to incorporate the costs and benefits of a transaction into an exchange. In this theoretical sense, the property rights themselves should also be tradable. In practical terms, this might involve a homeowner who wishes to extend their home, compensating a neighbour for any loss of sunlight or views.
We introduced the so-called ‘welfare economic’ case for land use planning in Chap. 2. Named after English economist Arthur Cicil Pigou, ‘Pigouvian’ welfare economics provided a rationale for planning regulation as a means of coordinating individual development and preserving public goods that the unregulated market would overconsume or underprovide:
It is as idle to expect a well-planned town to result from the independent activities of isolated speculators, as it would be to expect a satisfactory picture to result if each separate square inch were painted by an independent artist. No 'invisible hand' can be relied on to produce a good arrangement of the whole from a combination of separate treatments of the parts. It is necessary that an authority of wider reach should intervene and should tackle the collective problem of beauty, of air and of light, as those other collective problems of gas and water have been already tackled. (Pigou 1914, p. 1)
Although private agreements of the kind described earlier might provide a basis for resolving some of the problems associated with externalities, it is argued that these would be undersupplied in the market because of the high transaction costs associated with making and enforcing them (Needham 2006). For instance, without intervention, heritage and aesthetic qualities of places are likely to be “undervalued by present property transactions” (Webster 1998, p. 55). Even publicly imposed taxes might be insufficient to protect irreplaceable resources (such as areas of important biodiversity) or to manage the location of traffic generating development, because of the difficulties in pricing externalities and the differential capacity for actors to pay.
The problem of preserving public goods remains an important rationale for government intervention in the market. Ronald Coase (1960) pointed out that government regulations are not the only ways to manage externalities and may also be prone to high transaction costs, or promoted simply for communities to maintain exclusivity (Fischel 2004). Under this conceptualisation, the community becomes an economic actor, seeking to optimise certain objectives such as high property values and favouring particular planning regulations to achieve these goals. Land use plans and development controls therefore mediate property rights in administering development entitlements, either through straight allocation or through a negotiated ‘quasi-market’ system in which development entitlement is exchanged “in return for concessions, compensation levy, or betterment levy” (Webster 1998, p. 71).
Similarly, ‘public choice’ theorists question whether government intervention was always more efficient, arguing that if markets can fail, there could also be failures arising from state intervention as well (Webster 1998). They point to the potential “welfare maximising motives of government itself” whereby politicians or bureaucrats operate to further their own interests:
“The assumption underlying traditional welfare economics does not allow
for partisan realities like this: its assumption is one of a benevolent bureaucrat analysing policy options for efficiency.” (Webster 1998, 1084', p. 62)
Thus, Coasian and public choice perspectives help illuminate both the potential costs of regulation and how some groups may be more advantaged than others from any benefits.