Externalities and planning failure in the housing market of an African city

Abstract

PurposePlanning is logically applied to address negative externalities, but an alternative is financial compensation to the victim of negative spillover effects. This paper aims to examine the rent discount required to compensate tenants in an African city for a negative externality of the location of a grave within the bounds of their home. It also assesses the suitability of this as a remedy.Design/methodology/approachThis study adopts a discrete choice experiment to analyse tenants’ acceptability of the level of rent discounts when a grave is imposed on their home.FindingsThe study estimates that tenants in the Nigerian city of Akure require between 15 per cent and 20 per cent reduction in the rental value of a residential property to compensate for the imposition of a grave. However, many households would prefer to move elsewhere rather than negotiate a discount. Others, especially those on low incomes, were likely to suffer the loss of welfare without a rent discount. The study concludes that a compensatory approach is not an acceptable solution for welfare issues caused by the planning failure.Research limitations/implicationsThe investigation is based on a hypothetical choice experiment. However, the results obtained are subject to a series of validation processes.Practical implicationsAs reductions in the rent to compensate for the effect of a grave in a private home are unlikely in a market with excess demand, it is a clear argument for effective planning and environmental law.Originality/valueThis study is the first to assess the impact of negative externalities on the housing market of an African city.