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Teaching Urban Economics to Planners and the Role of Urban Planning toEconomists

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PRINTED FROM OXFORD HANDBOOKS ONLINE (www.oxfordhandbooks.com). (c) Oxford University Press, 2014. All RightsReserved. Under the terms of the l icence agreement, an individual user may print out a PDF of a single chapter of a title in OxfordHandbooks Online for personal use (for details see Privacy Policy).Subscriber: University of Queensland; date: 16 December 2014

PrintPublicationDate: Dec2011 Subject: EconomicsandFinance,Urban,Rural,andRegionalEconomics

OnlinePublicationDate: Sep2012

DOI: 10.1093/oxfordhb/9780195380620.013.0002

TeachingUrbanEconomicstoPlannersandtheRoleofUrbanPlanningtoEconomists NancyBrooksTheOxfordHandbookofUrbanEconomicsandPlanningEditedbyNancyBrooks,KieranDonaghy,andGerrit‐JanKnaap

OxfordHandbooksOnline

AbstractandKeywords

Thisarticleattemptstodemonstratethattheworkofurbanplannersandeconomistsisbuiltonacommonlanguage,andhenceshouldshareideas.Theiragendasbroadlyoverlap,butmanyineitherprofessiondonotrealizethis.Understandingthemicroeconomicfoundationsofthearrayofproblemsfacingurbanplannersisakeysteptogaininginsightsthatcanleadtoinnovativeandeffectiveplanningpolicy.Thisarticleaimsathelpingurbaneconomists(andmicroeconomistsingeneral)toappreciatethecomplexenvironmentinwhichtheplanneroperatesandtherelativeimportanceofequityandsustainabilityintheirwork.Thisincludes,forplanners,afoundationinmicroeconomicandurbaneconomicsand,foreconomists,anunderstandingofthecomplexenvironmentfacingplanners.Theresultthusanticipatedisamorethoughtfulresearchthatmakestheconnectionsfrompolicytomarketimpactsorfrommarketorindividualbehaviorandoutcomestopolicyeffectiveness.

Keywords:urbanplanners,economists,microeconomicfoundations,planning,marketimpacts,policyeffectiveness

Introduction:CommunicatingacrossDisciplines

Aleadingprogressiveurbanplanner,ThomasAgnotti(2008)describesthecriticaldilemmafacingurbanplannersas“howtowinthestrugglesagainsttheconcentrationofnoxiouslanduseswithoutcontributingtodisplacementandgentrification”(10).TheHarvardurbaneconomistEdwardGlaeser(2007),whodescribesthespatialequilibriumasthe“centraltheoreticalconstructofeconomicgeographyandurbaneconomics,”characterizesthepowerofthespatialequilibriumconceptasitsabilityto“predictthatifsomethingisparticularlygoodinonelocation,thenweshouldexpecttoseesomethingbadoffsettingit”(3).Initially,manystudentsseemnottorealizethatAgnottiandGlaeseraresayingthesamethingbecausethedisciplinesofplanningandeconomicstendtousedifferentlanguageandvocabulary,(p.16) aswellasdifferentmethodologicaltools.Yetthetwodisciplinesofurbanplanningandurbaneconomicsclearlyoverlapatthisveryfundamentallevel.Partofteachingurbaneconomicstoplannersandviceversaisprovidingthetools(analyticalandlinguistic)tomakethispointobvioustobothprofessions.

Understandingthemicroeconomicfoundationsofthearrayofproblemsfacingurbanplannersisakeysteptogaininginsightsthatcanleadtoinnovativeandeffectiveplanningpolicy.Forexample,withbasicmicroeconomicsitisstraightforwardtomaketheconnectionsfromprofit-andutility-maximizingbehaviortolandvaluecapitalization(viaRicardo1821;vonThünen1826)andtothespatialequilibrium(viaAlonso1964;Muth1969)andthebidrentmodel.OnecandirectlytiethesetheoriestoHenryGeorge's(1879)ideasonlandtaxationandthentocontemporaryplanningpoliciessuchastoday'sgrowinglandtrustmovement(Davis2010)thatprovidesperpetuallyaffordablehousinginmanycommunitiesortoinsightsintohowtofinancerailtransitinatransit-orienteddevelopment(TOD)project(Anas2008).Alongwiththeeffortsofintermediaries,suchastheLincoln


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InstituteofLandPolicy,facultycanhelpstudentsmakethesecross-disciplineconnectionsanddevelopthetheoreticallinksbetweentheunderlyingeconomicsandgoodplanningpolicy.

Moreover,helpingurbaneconomists(andmicroeconomistsingeneral)toappreciatethecomplexenvironmentinwhichtheplanneroperatesandtherelativeimportanceofequityandsustainabilityintheirworkisanotherteachinggoal.Forexample,thefirst-bestsolutionsthateconomistsoftenadvocatecanbetoosimplisticforthesecond-bestworldthatplannersinhabit.ScholarslikeArnott,Rave,andSchob(2005)havemadecontributionsindiscussingsecond-bestpolicywithregardtotrafficcongestionandcandidlystatethat“untilrecentlyurbantransporteconomistsignoredtheinteractionsbetweenurbantransportationinefficienciesandinefficienciesoutsidetheurbantransportsector”(2). Plannerswouldbenefitfromeconomistsfocusingmoreonmodelsthataremorerealisticreflectionsofthesituationswheretheyoperate.First-bestorsecond-best,thegoalistostructurepragmaticurbanpolicythatcanbeeffectiveincomplicatedurbansettings.

Inaddition,howeconomistsandplannersframeequityconcernsandthelanguagetheyusehasrealpolicyimplications.IthinkitisfairtosaythateconomistsinconductingwelfareanalysisfocusprimarilyonKaldor-Hicksefficiency.Economistsworktoidentifypolicieswherethenetbenefitsarepositiveormaximizedgiventhemenuofpolicychoices.Theefficiency-enhancingpolicyleadstoanewresourceallocationthattypicallymakessomebetteroffandsomeworseoff.Thepositivenetbenefitsimplythegainerscouldcompensatetheloserssothatatleastonepersonwouldbebetteroffandnoonewouldbeworseoff.Inotherwords,withthenewpolicythereexistsapotentialParetoimprovement,butinsteadofunpackingthedistributionalimpacts,economistsmaybesatisfiedthatsocialwelfarehasincreased.Plannersarelikelytobemoreconcernedwithactualcompensationofthelosers(p.17) (i.e.,movingclosertoaParetosuperiorallocation),ifnotforequityreasons,thenforpragmaticreasons.Manyofthecontroversialissuesplannersfacesuchasrentcontrol,displacementfromgentrification,lossofmanufacturingjobs,andNIMBYismareonesinwhichabroadercommonvocabularythatincorporatesamorenuancedunderstandingofefficiencyandacknowledgesitswinnersandloserscouldleadtobetterhousing,landuse,andlocaleconomicdevelopmentpolicy.

Kletzer(2002)empiricallydemonstratestheconcentratedcostsofeconomicintegrationforjoblossandemploymentchange:“Freetrade,openmarketsandeconomicintegrationcanfacilitateeconomicgrowth.Thebenefitsoffreetradeareconsiderableandwidespread.Butopenengagementwiththeworlddoesnothelpeveryone….Proponentsofexpandedopentradeandinvestmentfaceanobligationtoaddresstheconcernsofworkers,companiesandcommunitieswhocanbehurtbyfreetrade”(150).Downs(2004)similarlywalksthroughthetypicaleconomist'sargumentsontheefficiencygainsfrommarket-basedapproachestocongestionreductioncomparedwithregulatorypolicies(e.g.,even-oddlicenseplaterationing)butthenemphasizesthat“unlessthefundsfrompeak-hourtollscanbeusedtocompensatelow-incomedriversdirectly,roadpricingmayhaveregressiveeffect”(81)becausethespatialorganizationofcommunitiesissuchthat,inmanycommunities,poorerpeoplespendalargerpercentageoftheirincomeongasandwithspatialmismatchmayhavelongercommutes.Economicswillbemorehelpfultoequityplanners,andeconomistswillfinditeasiertotalktoplannersiftheefficiencyisdiscussednotjustintermsofthemagnitudeofnetbenefitsbutalsointermsinthedistributionoflosses.

Inthisintroduction,Ihaveattemptedtounderscorethefruitfulnessandimportanceofopeningthepathwaysofcommunicationbetweeneconomistsandplanners.Theiragendasbroadlyoverlap,butmanyineitherprofessiondonotrealizeitforlackofacommonfoundationinmicroeconomicsenlightenedbyarichunderstandingoftheroleofaplannerintoday'scommunities.WhileIlargelyagreewithArnott'ssentimentinchapter3ofthisvolumethat“economistsseethestrengthsofmarkets;plannersseetheirweaknesses,”itisbetternottomakeastrawmanofeitherdisciplineandinsteadconsidertheirmutualinterests.IntherestofthechapterIwillfocusonsomeareasofmicroeconomicsthatIthinkareespeciallyrelevantforacross-disciplinedialogue.Microeconomics,asadiscipline,canprovideananalyticalframeworkandvocabularyforplannersandeconomiststouse,butthatcertainlydoesnotimplyagreementwilloccur.Evenifplannersandeconomistsdofundamentallylookattheworlddifferently,thecommonlanguage,infact,generallymakesiteasiertocritiqueothers’workbecauseitmakesiteasiertounderstandthesourcesofdisagreement.BradDelongonceblogged,“Whenaquestionersuggestedasummitofthenation'sbesteconomists,Krugmansaidsomethinglike:‘Weknowwhatwillhappenifwebringtogetherthegreatesteconomicminds.It'sspreadacrosstheblogosphereeveryday,andit'snotpretty.’” Maybeitisnotalwayspretty(p.18) butalivelydiscussionbetweenplannersandeconomistswhocanspeaktoeachotherislikelytobemoreconstructiveovertimethanthestrawmanapproach.

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Insteadofrunningthroughthenecessaryingredientsforacoursesyllabusonurbaneconomicsandmicroeconomicsforplanners and/orplanningconceptsforeconomists,thischapterwillinsteadfocusontopicsthatIthinkareimportantbutperhapslessemphasizedthantheyshouldbe.

BehavioralEconomicsandUrbanPlanning

Itwouldbehardtooverstatetheimportanceofarichdescriptivemodelofhumanbehaviorindevelopingurbanpolicyandforplanningingeneral.Butbeforediscussingbehavioraleconomics,itisusefultosayafewthingsaboutnormativeutilitytheory.Ineconomics,marketefficiencyisjudgedwithrespecttothewell-beingoftheindividualsinaneconomyandbytheprincipleofconsumersovereigntyinwhicheachpersonisthejudgeofhisorherownwell-being.Evenwiththeirprofessionalinterestinplace-making,mostplanners(likeeconomists)wouldagreewithastatementofthissortbyEdGlaeser(2007)that“economicsjudgespoliciesbywhethertheyincreasethechoicesavailabletopeople,notonwhethertheyhelprebuildaparticularlocale.Economicsdoesnotprecludepoliciesthatareplace-basedsuchasurbanredevelopment,buteconomistsdoinsistthatthesepoliciesbejudgedonwhethertheyimproveindividual'slivesnotonwhethertheymadeaplacemorepleasant”(5).

Utilitytheorygivesusaframeworktohaveaconversationaboutwhichpoliciesmakepeoplebetteroffandwhy.Ofcourse,beingthejudgeofone'sownwell-beingdoesimplythatplannersandeconomistsneedtothinkabouthowtheywanttodefinetheambiguousrationalityconcept.RobertFrank's(2004)articulationofthedifferencesbetweenthepresent-aimstandardofrationality,theself-intereststandard,andtheconceptofadaptiverationalityisuseful.Inparticular,hedefinesadaptiverationalityasrequiringthatpeoplebeefficientintheirchoiceofmeanstoachieveagivengoal(thisisthedefinitionofpresent-aimrationality),but,inaddition,theyalso“regardgoalsthemselvesasobjectsofchoiceand,assuch,subjecttoasimilarefficiencyrequirement”(Frank2004,47).Frankthenusesanevolutionaryframeworktoshowthatanadaptivelyrationalindividualmightverylikelyhavepreferencesthatarenotnarrowlyself-interestedandinsteadbemorealtruisticandmoreconcernedaboutfairness.

(p.19)WhileIthinkfutureresearchwillcreatemorelinkageslikethisconnectingnormativeutilitytheorytoactualhumanbehavior,intherestofthissectionIwillconsiderbehavioraleconomicstobeamostlydescriptive/positivemodelofindividualbehaviorwhereouractualbehaviorcandeviatequitesubstantiallyfromthatpredictedbythenormativetheoryevenwhenmarketsareseeminglywell-functioning.AsBarr,Mullainathan,andShafir(2008)putit,“Theintroductionofricherpsychologycomplicatestheimpactofcompetition.Ithelpsusunderstandthatfirmscompetebasedonhowindividualswillrespondtoproductsinthemarketplace,andcompetitiveoutcomesmaynotalwaysandinallcontextscloselyalignwithimproveddecisionalchoiceandincreasedconsumerwelfare”(1).Plannersandpolicymakers,likeeconomists,arebecomingveryinterestedinbehaviorallyinformedpolicyandregulation.Giventhenewnessofthebehavioraleconomicsfieldalongwithitssuccessinprovidingdescriptiveinsightsaboutbehavior,thereislikelyafairamountoflow-hangingfruitwherebyefficiency-enhancingpoliciescanbeimplementedwithjust“nudges”orwhatThalerandSunstein(2008)call“libertarianpaternalism.”Mullainathan(oftenwithcoauthors)has,alongwithThaler,beenaleaderinthinkingaboutthepolicyimplicationsofaricherpsychologicalmodelofdecisionmaking(see,e.g.,Congdon,Kling,andMullainathan2011;Mullainathan2005).

Ifthereisoneotherdistinguishingcharacteristicofplanners,asidefromtheirconcernwithplace,itistheirfocusonthefuture.Consequently,aparticularlysalientissueforplannersisthebehavioralfindingthatmanyindividualshaveinconsistenttimepreferences.Mostofushavestrongpresent-biasedpreferencesthatwouldimplyahyperbolicdiscountfunction.Thisaspectofhumanbehaviorgivesrisetoabasicquestion:Whoshouldplannerscareabout,thepresentselvesoftheircommunityorthefutureselves?Policieswherethecostsareup-frontbutthebenefitsdelayed,suchasclimatechangepolicy,humancapitalinvestment,promotingenergyefficiencyprograms,oreventaxingcigarettes,haveimportantimplicationsforcitiesandtheirlocaleconomies.Plannersneedtothinkabouthowtoframepoliciesorstructurechoicessothatpresentselveswillchoosetotakebettercareoftheirfutureselves.

Thebehavioraleconomicsenterprisetoalargedegreehasbeenaboutcataloginganomaliesliketheonedescribedearlierthatwouldbehardtoexplaingivenconventionalutilitytheory.KahnemanandTversky'sprospecttheory(1979)hasprovidedalogicalframeworkforconnectingsomeoftheseanomalies,whichIwillreviewinbrief,butmainlyinthenextparagraphsIwillshareafewmoreexampleswherebehavioraleconomicsmightbe

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particularlyusefultoplanners.

KahnemanandTversky(1979)proposedthatpeopleevaluatealternativesnotwithaconventionalutilityfunctionbutinsteadwithavaluefunctionthatisdefinedoverchangesinwealthandthathasthecharacteristicthatthisvaluefunctionissteeperinlosses.Inthispurelypositivemodelofdecisionmaking,individualsconsidertheirlossesandgainscomparedwithareferencepoint(whichwecanassumetobethestatusquo)insteadofcalculatingthetotalutilityassociatedwiththeirconsumptionbundle.Giventhisframework,thereareseveralinterestinginsights.(p.20) First,framingmattersbecauseitdeterminesourreferencepointforevaluatinggainsandlosses.Second,becauseofthekinkatthereferencepoint,individualswillbemoresensitiveperdollartosmalllossesthantosmallgains—thisfindingiscalledlossaversion,andtheendowmenteffectisaformoflossaversion.Moreover,theshapeofthevaluefunctionimpliesthatutilitywillbeaffecteddependingonwhetherlossesandgainsarelumpedtogetherorseparatedandbyhowsalienttheyare.

ThalerandSunstein(2008)giveanexampleconsistentwiththetenetsofprospecttheorythatillustratesthechallengesofencouragingpeopletogetridoftheircarsevenifthenetbenefitsofcarownershiparenegative.Theirthoughtexerciseisto“considertheexampleofmembersofanurbanfamilydecidingwhethertobuyacar.Supposetheirchoicesaretotaketaxisandpublictransportationortospend$10,000tobuyausedcar,whichtheywillparkonthestreetinfrontoftheirhome.Theonlysalientcostsofowningthiscarwillbetheweeklystopsatthegasstation,occasionalrepairbills,andayearlyinsurancebill.Theopportunitycostofthe$10,000islikelytobeneglected.Incontrast,everytimethefamilyusesataxithecostwillbeintheirface,withthemeterclickingeveryfewblocks”(98).Thishypotheticalfamily'srelevantreferencepointisoneinwhichtheyhavealreadyincurredthecostsofcarownershipandthusfeelthateachcartripisrelativelyinexpensive.Ontheotherhand,iftheyarewithoutthecar,theyintenselyfeelthelossesincurredinregularlypayingfortaxisorbuyingsubwaytokensfortheentirefamily.Evenifthetotalcostsofpublictransitaresignificantlylowerthanthoseofowningacar,thefamilymightstillchoosethelatter.Nudges,likeofferingmethodsofprepayingforpublictransit(especiallymethodswherepeoplearenothandicappediftheylosetheirtransitpass)thattakethisbehavioralinsightintoaccountcouldpromoteuseofpublictransitoratleastgiveplannersanewanglefromwhichtolookattheproblemofurbanautomobilecongestion.

Inaneconomicdevelopmentexample,Thomas(2007)discusseshowlossaversioncanleadtoapossiblewinner'scurseinhisdescriptionofhowcompaniesusethreatsofconsolidationorrelocationtotriggerbiddingwarsbetweenlocations.Inthispaper,heusestheexampleofMastercardInternational'sdecisionin1997toannounceitsintentiontoconsolidateitsseveralSt.Louisareafacilitiesintoasinglelocation,notnecessarilyinSt.LouisorevenMissouri.MastercardreportedlyconsideredfifteencitiesbeforenarrowingthedecisiontoDallasversussuburbanSt.Louis.Thomasarguesthat“withouthavingaccesstoMastercarddecision-makersanddocumentation,itisimpossibletosaywhatthelowestamountofsubsidythecompanywaswillingtoaccept,butitlikelywasconsiderablylessthanwhatitreceived”(49).Whileotherpapers(e.g.,FriedmanandMason2004)discussthewinner'scursewithregardtoeconomicdevelopmentdecisionssuchaspublicsubsidiesforsportsfacilities,and,ofcourse,thereistheDaimlerChryslerCorp.v.CunoSupremeCourtcase,ThomasemphasizesthepossibilitythatlossaversionispartofthereasonSt.LouisoutbidDallas.Theflypapereffect(HinesandThaler1995)isalsoalocaleconomicanomalythatcanbetiedtolossaversion.

Therearemanymoreexamplesofhowbehavioraleconomicscanbeusefultoplanners.Someplannersarealreadyusingtheseinsightsintheirresearch,forexample,Mohamed(2006)onthemotivationsoflanddevelopers.

(p.21) ContextMatters

DaniRodrik'srecentbook,OneEconomics,ManyRecipes;Globalization,InstitutionsandEconomicGrowth,mayormaynotbeofdirectinteresttourbanplanners,butthekeylessonofthebookshouldbeofinteresttothem;moreover,manyeconomistscouldprobablyusethereminder.Rodrikdefinesbasiceconomicphilosophyinthefollowingway:“Socialphenomenacanbestbeunderstoodbyconsideringthemtobeanaggregationofpurposefulbehaviorbyindividuals—intheirrolesasconsumer,producer,investor,politician,andsoon—interactingwitheachotherandactingundertheconstraintsthattheirenvironmentimposes”(3,italicsmine).Hegoesontosaythat“thetendencyofmanyeconomiststoofferadvicebasedonsimplerulesofthumb,regardlessofcontext(privatizethis,liberalizethat),isaderogationratherthanaproperapplicationofneoclassicaleconomicprinciples”


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(3).Economistshaveusefulgeneralprinciplesthatcanhelpstructureourthoughts,andtheplannersinourcommunitiesandcitiesunderstandthespecificcontext.Ittakesbothpartiesworkingtogetherwitharichunderstandingofboththeeconomicprinciplesandthecharacteristicsofthelocalityandregiontocreatevibrant,well-functioningplaces.

Thismessage,thatcontextmattersindeterminingpolicy,isimportant.Letusconsidertheroleoffiscalfederalisminurbanpolicy.Oates(1999)reviewsthenormativeassignmentofpolicyfunctionstodifferentlevelsofgovernment,givingthecentralgovernmentthebasicresponsibilityforincomeredistributionandassistancetothepoorandformacroeconomicstabilization.Ofcourse,thefederalgovernmentdoesmuchmorethanthis,andmanyfederalpoliciesimpactourcitiesandcommunities.Someofthesecentrallyadministeredpoliciestendtobeonesizefitsall,whichmaybeinappropriatebecauselocalconditionsmatter.GlaeserandGyourko(2008)giveniceexamplesintheirrecentbookonfederalhousingpolicy,includinghowtheincidenceofthefederallyadministeredmortgageinterestdeductionvariesbylocation.Whilestatutoryincidencefallsonthehomeownerswhoitemizetheirtaxes,economicincidenceisafunctionoflocalhousingmarkets(specificallytheelasticitiesofthesupplyanddemandintherelevantmarket)andcanthusdifferwidelyfromregiontoregion.InSanFrancisco,wheredemandforhousingisstrongbutwheretherehasbeenlittlenewbuildinginrecentyears,themortgageinterestdeductionactstoincreaseprice,makinghousingevenmoreunaffordableespeciallytothosewhodonotitemize.ComparethissituationwithAtlanta,wherenewhomeconstructionhaskeptpacewithpopulationgrowth.InAtlanta,thesubsidyencouragesbuilding,andhomepricesremainrelativelystable.InAtlanta,themortgagedeductiondoes,infact,makeitlessexpensivetoownone'shome.GlaeserandGyourko(2008)argueforanewfederalhousingpolicythatiscontext-dependentinthatitisdesignedtoincentivizeconstructioninareaswithcurrentlyinelasticsupply.

(p.22) Anotherexampleisthedebateontheincidenceandefficiencyofthepropertytaxwheretherearetwoconflictingviews:thepropertytaxasprimarilyabenefittax(Fischel2001a,2001b)versusthepropertytaxasadistortionarytaxoncapital(alsocalledthe“newview”[Zodrow2001]).Bothviewsrequirefairlystrongassumptions,andatleastsomeofthoseassumptions(residentialmobility,elasticityinthenumberofcompetingcommunities,andzoningissues)arefunctionsofplace.Thuscontextisimportantininterpretingtheeffectsofthelocalpropertytax.

Identifyingbestplanningandpolicypracticesbyusingstatesaslaboratoriesforpolicycanbebeneficial,buteconomistsandplannersmustunderstandhowthegeneralprinciplesofeconomicscombinewiththecharacteristicsofspaceandplace.Thiswillgiveguidanceaboutwhensuccessfulpracticescanbesuccessfullytransplantedandwherethosepolicieswillneed,ataminimum,tobetailoredtolocalconditions.Thisdoesnotnecessarilyimplydecentralizationofactivitiessuchasredistributionthatnormativefiscalfederalismassignstothecentralgovernment,butitsuggeststhatlocal,state,andregionalgovernmentsshouldbeallowedmoreflexibilityindesigningplace-specificpolicy.HowHUDallocatesitsCommunityDevelopmentBlockGrants(CDBG)isoneexampleofhowthisisalreadydone.HUDprovidesthegrant,butlocalitiesdecidehowthefundswillbeused.

TheMixedEconomy

SinceAdamSmith'sinvisiblehandandthefundamentalwelfaretheorems,publiceconomistshaverationalizedgovernmentinvolvementinthemarketeconomyinlargepartbyidentifyingmarketfailures.Bartik(1990)arguesthatusingamarketfailureapproachtodeveloparegion'seconomicdevelopmentpolicyprovidesausefulconceptualframeworkforevaluatingtrade-offsandrationalizingpolicychoices.Hearguesthatthemarketfailureapproachfocusesourattentionontheareasofthelocaleconomywhereprivatemarketperformanceistheweakestandthuswheregovernmentpolicymaybemosteffective.Economicdevelopmentpolicycanbeacontroversialareaasmentionedinthefirstsectionofthischapterandasdiscussedinthepopularpress(see,e.g.,LeRoy2005).Thus,illuminatinghowaneconomicdevelopmentpolicyreducesaparticularmarketfailureshouldreducecontroversybymakingthegoalsofthepolicymoretransparentandopentoevaluation.

Ofcourse,identifyingamarketfailureisnotasufficientconditionforagovernmentresponse. Howresponsibilitiesfortheoperationofawell-functioningmarketeconomyaredevolvedbetweenthepublicandprivatesectorcanbeahot-button(p.23) issue.Ontheonehand,goodgovernmentisapurepublicgood(nonrivalandnonexclusionary)and,therefore,likelytobeinadequatelysuppliedandnotalwaysuptothetaskofsolving

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societalandmarketproblems.Principal-agentmodelscanhelpplannersandeconomistsunderstandsourcesofbothgovernmentandmarketfailureandareakeytoolinpoliticaleconomyanalysis.Besley(2006)arguesthatgoodgovernmentrequiresbothawell-designedinstitutionalframeworktoaffecttheincentivesofgovernmentofficialsandalsoselectionmechanismstoencouragegoodleaderstoseekrolesingovernment.Thedisillusionmentwithtraditionalplanningandplannersthattriggeredthegrowthofequityandadvocacyplanning(Davidoff1965)isamechanismdesignissue. Politicalandbureaucraticinstitutionsmatter,andbothplannersandeconomistshaveasharedstakeinthisresearchagenda.

Ontheotherhand,though,theargumentforprivatizationisfrequentlymadesomewhatdisingenuously.JohnRoberts'sbook(2004)onthemodernfirmmaynotinitiallyseemrelevanttoanurbanplanner, butthebook'scorequestions—“Whyaretherefirms?Whydoweoftenusefirmstocoordinateandmotivatebehaviorinsteadofrelyingonindividualmarkets?”—arefundamentaltounderstandingtheprivatizationanddevolutionissue.RobertscitesaninterestingstatisticfromMcMillan(2002),whoestimatesthatlessthanathirdofallthetransactionsintheU.S.economyactuallyoccurthroughmarkets,andinsteadmorethan70percentarewithinfirms(Roberts2004,78).Thisstatisticillustratestheneedtoreframethemarket-versus-governmentdebate.Therhetoricofprivatizationcannotrelyprimarilyonthevirtuesofthemarketwhentheactualprivatizationmightmeandevolvingresponsibilityfromgovernmenttoaverylargefirm—perhapsevena(natural)monopoly.Theintellectuallymoreinterestingandarguablymorehonestwaytoframetheissueisnotsimplymarketversusgovernmentbutwhywoulda(regulatedorunregulated)privatefirmbebetterthanagovernmentstructure,andwhataspectsofthatfirm'sandindustry'sstructureareimportantinimprovinguponagovernment'sperformance?Insummary,thekeyideaisthatmarketapproaches(includingpromotionofcompetitionandincentivizing)shouldnotbeconflatedwithprivatization.

PlannersHefetzandWarner(2004)lookatnewpublicmanagementinlightofthegovernmentcontractingprocessandarguethatatheoreticalframeworkisneededthatgetsbeyondthemarket-versus-governmentfailuredichotomy.Efficiencygainsand/orcostsavingarenotguaranteedwithprivatization.

(p.24) Capitalization,Sorting,andHedonicAnalysis

Capitalizationisthetermusedbyeconomiststodescribehowhousingpriceschangetoreflectchanginglocationalcharacteristics. Thespatialsortingthatispartofthisspatialequilibriumprocessmighthavesomeefficiencypropertiesasshoppingbetweencompetingcommunitiesallowspeopletovotewiththeirfeetforlocalpublicgoodsandcanhelpusunderstandhowtothinkaboutoptimalfiscalfederalism(Tiebout1956).EventhoughtheconditionsrequiredforTieboutsortingtoleadtoanefficientlocalpublicsectorarestrong,thedynamicsortingandspatialequilibriumprocessitselfisanextremelyusefuldescriptivemodelthatconnectssuchworksasSchelling's(1956)modelofsegregatedneighborhoods,Been's(1994)importantworkonenvironmentaljusticeandmarketdynamics,Frug's(2001)frustrationwiththelimitsofcitypowerandVigdor's(2010)workonurbanrevitalizationandgentrification.Insummary,priceadjustmentsandmobileresidentscanmaketheplanningagendacontentiousevenasthosesameadjustmentsmightpromoteefficiency.Sagalyn(2009)commentsonhow“anumberofactions—includingchangesinlanduseregulations,designationsoflandmarkstructuresandhistoricdistricts,transitimprovements,districtredevelopmentplans,set-asidesforaffordablehousing,andsitingofpublicfacilities(fromthedesirable,suchascommunitygardens,tothelessdesirable,suchaslandfills)—cantriggerintenseconcernabouttheireffectonthevalueofland,homesandbusinessproperty.”(85)

Inmyopinion,onesourceofmiscommunicationbetweenplannersandeconomistsstemsfromafailureofbothpartiestobepreciseabouttheirsupportorcriticismswithregardtovariousaspectsofmodels.Ifonedisagreeswithoneaspectofamodel(e.g.,itsnormativeimplicationsand/orunderlyingassumptions),heorsheislikelytoignoreitsotheraspects(e.g.,itsdescriptiveassociations).BacktoTiebout,evenifaplannerknowsthatitisvirtuallyimpossibleforaregiontoachievetheconditionsthatwouldleadtoanefficientTieboutsortingmechanism,thereisstillgoodreasonfortheplannertobewellversedinthecharacteristicsoftheTieboutmodel.Ashesays,“Spatialmobilityprovidesthelocalpublic-goodscounterparttotheprivatemarket'sshoppingtrip”(Tiebout1956,422).Peopledosortthemselves,andthishasrealequityandefficiencyimplicationsforlocalpublicandplanningpolicy.

TheCoasetheorem(1960)isanotherexampleinthatonedoesnothavetobelievemarketsareabletosolvemost

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externalityproblemstoagreewiththetheorem'susefulnessinframingexternalitiesasreciprocalproblemsinvolvingatleast(p.25) twoconflictingparties.Thisinsightisveryhelpfulinstructuringpoliciestoaddressexternalityproblemsandhasbeenfundamentaltothedevelopmentofthelawandeconomicssubfield.ThespiritofmuchoflawandeconomicsisCoasianinthatthegoalistoachievesolutions/remediesthatwouldhavebeenreachedhadpartiesbeenabletonegotiatewitheachother.

Thecapitalizationprocessalsoprovidesamethod(albeitdataintensive)tofindpricesoropportunitycostsforgoodswherenomarketsexist. Plannersareoftenrequiredtodocost-benefitanalysesorenvironmentalimpactanalyseswherethequalityoftheanalysisislargelyafunctionofhowaccuratelythesenonmarketedresourcesorlocalpublicgoodsarevalued.Ahistoryofoftenpoorlydonecost-benefitanalyseshasmadesomecriticalofthemethod.Microeconomics,though,atitsheart,isaboutunderstandingandvaluingtrade-offs,andthecost-benefitprincipleisacoreconcept.Thusmicroeconomicshasitsreputationbasedonthepromiseofaccuratelymeasuringprices.Thechallengeofhowtogetpricesright(andhowtocorrectlymeasureopportunitycosts)isessentialtobothbettereconomicsandplanning.Itseemstomethatitwouldbeafruitfulenterprisetohaveplannersandeconomistsworktogethermorecloselyonhowtoimproveourmethodsforfindingprices,whetherthroughhedonicsthatrelyonpricecapitalizationorotherstrategies.

Agglomeration,UnevenEconomicGeography,andItsDynamics

Krugman's2008NobelPrizeandtheWorldBank's2009WorldDevelopmentReportoneconomicgeographyhavespotlightedresearchonthecausesandconsequences(bothstaticanddynamic)ofspatialeconomicagglomeration.Basicproducertheoryprovidestheanalyticalfoundationforunderstandingwhyinputsharing,labormarketmatching,andknowledgespilloverscancreatefeedbackloopsthatleadtoeconomicconcentration,pathdependence,andpunctuatedequilibriaandisthefirststepinacquiringtheanalyticaltoolstoaccesstherichresearchthatisbeingdoneinthisarea.

Eventhoughmicroeconomicsisimportant,letusnotforgetthatthisisoneareawhereeconomistssuchasKrugman(e.g.,2001,2009)andLucas(1988)havedrawninspirationfromorcollaboratedwithplanningandregionalsciencescholars,withJaneJacobsandMasahisaFujitabeingtwooftencitednames.Whileturfbattlesbetweengeographers,economists,regionalscientists,andplannersmaybesimmering,thekeypointisthateconomicgeographyisanareawhereallthesedisciplinesareheavilyinvestedinmakingintellectualprogress.Citiesarenowwidelyunderstoodasenginesof(p.26) economicgrowthandakeypartofNewGrowthTheory.Agglomerationeconomiesareaprimaryreasonforunevenspatialdevelopmentandinequalityandareanimportantpartofmodelslinkingdevelopmentandtrade.Therelationshipbetweensourcesandtypesofagglomerationeconomies(urbanizationorlocalization)andcitystructureandsizeinspiresresearchonthemeritsandimplicationsofmonocentricversuspolycentricurbanform—animportantissueforlocaleconomicdevelopersandplanners.

Conclusion

InthischapterIhaveattemptedtoshowthatplannersandeconomists(andalliedsocialscientistsandpolicypractitioners)havegoodreasontoreadeachother'sworkandbuildacommonlanguageinwhichtoshareideas.Thisincludes,forplanners,afoundationinmicroeconomicandurbaneconomicsand,foreconomists,arichunderstandingofthecomplexenvironmentfacingplannersandthemultiplegoalsthatplannersmustbalance.Theresultwillbemorethoughtfulresearchthatcarefullymakestheconnectionsfrompolicytomarketimpactsorfrommarketorindividualbehaviorandoutcomestopolicyeffectiveness.

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Notes:

(1.)Zoningandotherland-useregulationsarealsoworthconsideringmorethoughtfullyassecond-bestpolicies.

(2.)http://delong.typepad.com/sdj/2009/02/the-worlds-greatest-economic-minds.html.

(3.)Iwillnotethatasidefromthegenerallyexcellentmarketleadingurbaneconomicstextbooks,IhavefoundFriedman(2002)tobeaverygoodtextbookforteachingeconomicstoplanningandpublicaffairsstudents.

(4.)Understandingthedeterminantsofhousingsupplyelasticityandaffordabilityiscurrentlyanactiveresearchareaforbothplanners(e.g.,Pendall2000)andeconomists(e.g.,Saiz2010).Saiz(2010)exploresbothgeographyandregulationsandusingideasfromFischel(2001)arguesthatstricterland-useregulationsareendogenousandpositivelycorrelatedwithphysicallandconstraints.

(5.)Obviously,amarketfailureisalsonotanecessaryconditionforagovernmentresponseaspurelydistributionalconcernscanmeritpolicyaction.

(6.)Advocacyplanningandpublicchoicetheoryoverlapasadvocacyplanningcanbeseenasaresponsetotheregulatorycaptureofplannersandplanningdepartments.JaneJacobsasanurbanplanningheroversusprofessionalplannerRobertMosesisacommonlyusedexampleofplanningactivistversus“captured”planningofficial.

(7.)Throughoutthischapterbutespeciallyinthissection,Iamdefininganurbanplannerbroadlyassomeoneforwhomlocaleconomicdevelopmentandlocalpublicgoodsplanningandprovisionarepartoftheirresponsibilities.

(8.)Analogously,thereisalargeurbaneconomicsliteratureoncompensatingdifferentialsinwagesthatarise,inpart,fromwagescapitalizinganarrayoflocationalcharacteristicssuchasagglomerationeconomies,amenities,andfiscalpolicies.

(9.)Fischel(2001a)inhisbookofthesamenamelabelsthisattentivenessofhomeownerstotheoutcomesoflocalpublicpoliciessuchasthosedescribedbySagalynasthe“HomevoterHypothesis.”

(10.)Contingentvaluationisanother(imperfect)methodforestimatingprices.

(11.)HUD's2008report(Carlineretal.2008)ontherelationshipbetweenresidentialdevelopmentregulationandhousingmarketsandhowtheseimpactlabormarkets,businesslocationdecisionsandeconomiccompetitiveness,laborproductivity,industrialcompositionandothereconomicfactorsisaniceexampleofapiecethatreflectsanunderstandingandsensitivitytobothplanningandeconomics.

Kleiman's(2009)bookoncrimeandpunishmentisanotherexampleofhowgoodeconomicscombinedwithclarityaboutthecomplexityoftheissuecanleadtonewideasthatcouldmakeamajordifferenceinpolicy.

NancyBrooksNancyBrooksisVisitingAssociateProfessoratCornellUniversityintheDepartmentofCityandRegionalPlanning,andhasalsobeenontheeconomicsdepartmentfacultyattheUniversityofVermont.SheearnedherPh.D.ineconomicsfromtheUniversityofPennsylvaniain1995.Herresearchinterestsareinappliedurbanandenvironmentaleconomics.ShehaspublishedintheJournalofEnvironmentalEconomicsandManagementandtheJournalofEconomicBehaviorandOrganization.


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