A transaction-cost theory of land use planning and development control

Abstract

Discussion of public land use planning and development control has given different answers to the question *... why does society choose this institution of government regulation of land uses?' (Lai, 1994, 81). Many of them are premised on Pigouvian welfare economics, which use the concept of market failure to account for public intervention. Failures in supposedly perfect markets include negative externalities (for example environmental pollution), positive externalities demanding some public-private goods (such as education), and pure public goods that the market cannot supply (for example defense).Applied to planning, this rationale justifies public intervention in what would otherwise be a spontaneous property market and an unregulated land development process (Moore, 1978; Mills, 1979; Klosterman, 1985). These market failures include negative externalities demanding separation of incompatible land uses, positive externalities suggesting the integrated planning and development of compatible or synergistic land uses, and the 'public goods' aspect of necessary public facilities, open space and infrastructure investments (Lai, 1994, 78-80).This is really a special case answer to the broader question of the societal role of planning which is still being debated. In this debate the subject may be generic planning, ranging from planning as 'ordinary forethought' (Branch, 1990, 4-9), through planning as an attribute of all intentional action (Miller et al., 1960), to associating planning with hierarchical organisation (Alexander, 1992a).When the subject is limited to public planning and intervention in the broadest sense, various positive rationales have been offered. From an institutional perspective these include the link between planning and governance (Healey, 1997, 205-19) or with the functions of government (Friedrich, 1969). From a socio-economic perspective they include the market failure justification, supplemented by arguments from games and public-choice theory (Alexander, 1992b, 121-23) and the communitarian case for a public domain (Friedmann, 1987, 335-40; Etzioni, 1993).On the other hand, public planning may also have negative societal roles- as an instrument of social control for implementing state policy (Yiftachel, 1998), or serving oppressive or indifferent urban regimes (Feldman, 1995; Flyvberg, 1998). But here the question is not about public planning in general; it focuses on land use planning in particular. Consequently, the following discussion is limited to explanations for public land use planning and development control and their implications.1One of these is Coasian transaction-cost economics which have also addressed the above question. Like Pigouvian welfare economics, Coase queried the simplistic assumptions underlying classic economics, focusing on the nature and costs of economic transactions. Contrary to the classic 'perfect market' where prices (allowing only for production costs and profit) find their optimal equilibrium between multiple buyers and sellers, Coase suggested that there are transaction costs too, such as information cost, performance monitoring and contract enforcement. To minimise these, markets are modified in predictable ways, which include hierarchical organisation (the emergence of large firms and corporations through vertical or horizontal integration) and institutional governance (self or third-party regulation) to provide a framework for determining and enforcing market actors' rights.2Coasian transaction cost economics justifies public land use planning and zoning as a form of institutional governance that regulates the property rights framework necessary for land and real-estate markets to function (Lai, 1994). But, after his very comprehensive answer, Lai modifies the question to ask... whether the cost of [government intervention] is greater or smaller than the alternative of ... the unregulated market. To answer this question, it is possible to compare the opportunity costs of alternative institutional arrangements. …