Modeling the externalities and redevelopment of a run-down area

Abstract

This paper models the redevelopment of a run-down area in terms of the externalities from abandonment to apply to the slow response time of the local government and private firms to redevelop such areas. The conversion of abandoned properties for new uses creates two types of positive externalities, real externalities and pecuniary externalities. The first refers to a productivity gain for all firms due to the elimination of negative nuisance of abandonment, while the latter refers to an output price decrease due to the increased production as a result of the conversion. In the case of private development, these externalities are not fully considered by private firms, leading to delayed conversions. The redevelopment process may also be delayed by the fragmented ownership of properties. This paper shows that conversion occurs earlier in the case of single ownership than for fragmented ownership, if the real externality is dominant to the pecuniary externality. In the case of local optimum, the local government considers both types of externalities but only maximizes the value of the properties within the community. The local government fails to take into account the effect on society as a whole, leading to delayed redevelopment. These results suggest the need for interventions of the central government for managing abandoned properties at the early stage of abandonment.