Chapter Two - Necessity of a minimum floor area regulation

Abstract

Urban areas in most countries are confronted by various externalities. Agglomeration externalities arise in business areas, based on communication among people and firms. Negative externalities, which typically include traffic congestion, congestion in public facilities, noise, and insufficient sunlight, are prevalent in business areas and residential areas. This chapter argues that, to manage these externalities with floor area ratio (FAR) regulations, a minimum FAR regulation, though not common in current practices, is necessary nevertheless, along with a maximum FAR regulation. This chapter examines where and how to impose FAR regulations in the presence of negative externality arising from population density using a simple two-zone city model in which population density externality is larger in one zone than in the other zone. Applying the model to obtain optimal FAR regulations following Kono et al. (2010), we show that a maximum FAR regulation should be imposed in the zone with larger externality and a minimum FAR regulation in the other zone. In other words the imposition of only maximum FAR regulations, a practice common in actual city planning, is not optimal. This necessity of minimum FAR regulations has also been argued by Joshi and Kono (2009). For designing a second-best policy, the deadweight losses in the related markets play an important role. This chapter shows how a minimum FAR regulation minimizes the total deadweight loss, hereby justifying its necessity. We also verify, through numerical simulation, the necessity of simultaneous imposition of minimum and maximum FAR regulations in a monocentric city with traffic congestion externality. We also compare welfare gains under market equilibrium and different policy regimes including congestion toll (first-best policy), FAR regulation, urban growth boundary (UGB) regulation, and FAR with UGB regulations.