Download 1. Economic Rationale for Planning

1. Economic Rationale for Planning:
• market failure: market cannot operate;
• efficiency & fairness: logic of externalities
Nigel Flannigan,
Associate, SGS Economics & Planning.
Email: [email protected]; &
Senior Fellow, University of Melbourne.
Email: [email protected]
November 2013
Urban development: stakeholders/ actors
in process of urban development. (after Neutze).
Consumers: individuals,
households, communities,
businesses, industry groups,
government & govt agencies
that use urban facilities
Producers: individuals,
groups, businesses, govt
agencies that provide
production factors (land,
labour, capital) to develop
urban facilities
Managers: individuals,
groups, businesses, govt
depts & agencies legally
empower to manage the
process of urban facilities in
the public interest
Planners (subset):
individuals, groups, govt
depts & agencies focusing
on urban/ city development
in public interest.
Urban planning & economic development
consumers:
user satisfaction
decision, actions
by consumers
with process & form
of development
decision, actions
by producers
managers:
decision, actions
by users
desirable end
planners:
policies &
programs
to influence
development
in public interest
continuum
producers:
undesirable end
environment:
user dissatisfaction
factors outside
control of actors
with process & form
of development
The market = market economy
Economic system where production & distribution of goods &
services occurs through mechanism of markets, ostensibly ‘free’:
• Consumers (private, business & govt) alone decide what
they consume by what they purchase;
• Producers alone decide what is produced & how much;
price to charge customers; what wages to pay employees.
Decisions influenced by pressures of supply & demand in
conditions of competition.
Govternment has minimum role possible: to keep market ‘free’!
Planned economy =
Economic system where govt decides what is produced, in
what quantities & who receives benefits (& how much).
Conditions for ‘perfect’ competitive market
•
•
•
•
many buyers & many sellers;
homogeneous product;
full information about offerings;
transactions affects only buyer & seller (no externalities).
Pareto optimo achievable in perfect competitive market:
‘one person cannot become better off without others
becoming worse off’
Deemed ‘economically efficient’ = no public (govt) intervention!
Doesn’t guarantee equitable/ fair distribution of income/ wealth.
No economic-political system is totally ‘free’. Mixed economies
combine traits of both ‘free’ & ‘planned’ (command) markets.
USA leans to ‘free’ end of spectrum & Scandanavia countries
lean towards ‘planned’/ ‘command’ end of spectrum.
Planning (generic) & the market
Planning can be categorised on attitude to market:
• market is inherently efficient/ benign & needs to
be nurtured: ‘free market’ concept;
• market is inefficient/ inequitable & needs to be
controlled: 'market failure' concept;
• reality: most plans are mixture of both.
Planning in Australia acts to influence outcomes of
market without destroying competitive market.
At what point is market destroyed? Private sector =
significant implementation agent & if cannot get
reasonable returns it will not develop/ implement.
Facilitation requires balance between public interest
& private interest.
Market failure:
rationale for government intervention
(after Samuelson and Musgrave & Musgrave)
Cities develop by interaction between users & producers in
market process. Market delivers many facilities & services
needed; but fails or operates inefficiently for others.
Eg. facilities & services for low income people.
Reasons for Market Failure
• Non-excludability: goods & services once available to
one person, cannot feasibly be denied to others.
• Non-rival consumption: goods & services consumed by
one person does not deplete opportunity/ benefit for others.
NB: definitions not absolute: some facilities & services display
characteristics of each.
'privatisation': public facilities & services now 'private'.
Community facilities & services: characteristics
Private goods: consumption is rival & excludable. Adequately
provided by market process.
Social or public goods: non-excludability or non-rival
consumption characteristics. Impossible, inefficient,
undesirable to limit use to payers. Eg. open space/nature
conservation, police & fire protection, preventative medicine.
NB: 'public' does not mean 'government'
Merit goods: rival & excludable, hence 'private'. Consumer
choice not to consume has social cost. Eg. education &
schools, museums, galleries, prisons (demerit), sports centres.
Joint goods: rival & excludable (so private) with little social cost
in non-consumption. Consumer choice of supplier or supplier
choice of customer is inefficient/ inequitable. Eg: transport
systems (streets & roads, public transport) & utilities (sewerage).
Common govternment facilities & services
NB: 'public' does not mean ' government ' but it sets case
for it to provide facility or service:
• transport: roads, railways, airports
• energy utilities: gas, electricity
• water utilities: water supply, drainage
• disposal facilities: sewerage, solid waste disposal
• protection: police, fire, corrective services (prisons)
• education: libraries, primary & secondary schools
• public health & welfare: hospitals, clinics, clubs
• recreation: parks, sports grounds, camps
• environment & amenity: nature conservation, parks
• heritage: conservation of historic building, places.
Many of these facilities & services have been privatised in
recent times despite retaining 'public' characteristics.
Charging for public facilities & services
Conventionally public facilities & services are
provided free. However increasingly they charge,
nominal amounts.
Dilutes concept; but rationale is to:
• limit extent of cross subsidy from nonconsumer to consumer: some members of
society may be genuine non-consumers.
• discourage wastage - no charge makes
marginal cost of using a facility = zero.
Efficiency & fairness: logic of externalities
Planning allocates use & development rights to specific sites as
basis for private investment decisions. Aim = economic
efficiency = certainty that investment within plan will not be
wiped-out by subsequent private (or public) investments.
externality definition: cost or benefit accruing to one use
caused by activity on another over which it has no control &
for which it neither pays nor receives monetary compensation.
negative externality: development or activity imposes costs
in value-reduction effect. Eg. noisy/ dirty business decreases
enjoyment (& value) of adjacent residential use.
positive externality: development or activity confers benefit
in value-adding effect. Eg. development of park increases
enjoyment (& value) of adjacent residential use.
Economic rationale for use zoning:
prevent negative & exploit positive externalities
Separation/ Dispersion
• Separate incompatible uses: minimise negative
externalities; locate compatible uses between.
• Disperse uses at set intensity: less pressure on services;
Clustering/ Agglomeration
• Cluster uses with affinity: exploit positive externalities;
• Concentrate uses around services to minimise cost;
Cost Inefficiency: create scarcity values
Inadvertent side-effect: unearned increments of land values
to owners, developers & speculators.
• limits where development can/ cannot occur:)
• creates scarcity/ value in land for high value uses
• reduces competition = higher prices to end users.
Exclusionary Zoning
Versed as: use/ development excluded from zone (most
common zoning). Can be conservative force:
• prevent land use change, even if in public interest.
Eg. medium density housing for sustainability;
• used to maintain status quo! Eg. exclude
‘undesirables’ by excluding facilities they need.
Inclusionary zoning
Versed as: inclusion of uses/ facilities. Eg. to include %
welfare housing in residential area; or a kindergarten.
Alternative: provide incentive for inclusion. Eg. density
bonus: more development in return for welfsre housing.
Urban settlement = agglomeration of people
(people living closely/ closer together)
Externalities are endemic to urban settlement/ development.
Positive externalities - offer agglomeration economies.
• increased market demand for goods (& services);
• exploitable economies in production & distribution of goods:
‾ economies of scale: from size/ volume of goods;
‾ economies of scope: from range of goods.
Negative externalities - increase with agglomeration.
Eg. spreading economic activities reduce nuisance effects
(noise, pollution, congestion, etc) on adjacent activities.
Negative externalities = prime reason for public intervention in
planning. Aim = minimise negative externalities & maximise
positive externalities. In practice focus =negative externalities.
City = repository of cumulative investment.
Economic efficiency requires:
• protection of earlier private investment/ development
from subsequent new private investment/ development;
• public investment/ infrastructure be exploited to
maximum by subsequent investment/ development
Example: policy requiring retail to locate in-centre.
Rationale: established centre = manifestation of past & ongoing investment (public and private). Out-of-centre
development denies activity centre additional investment.
It decimates value of existing investment by transferring
value out-of-centre. New out-of-centre retail also results
in additional public investment/ infrastructure
Leveraging productivity from public investment.
Economic efficiency requires:
potential returns/ benefits from public investment/
infrastructure be exploited (to maximum) by
subsequent private investment/ development.
Example:
public investment in railway station exploited by
providing regulatory support (esp. zoning) for
adjacent area to be available for higher productivity/
density development. Higher density residential,
shopping & employment around station translates
into more people flowing through station.