The Political Allocation of Property Rights: An Application to State Land Use Regulation

By Pompe, Jeffrey; Lipford, Jody W. | Journal of Private Enterprise, Fall 2002 | Go to article overview

The Political Allocation of Property Rights: An Application to State Land Use Regulation


Pompe, Jeffrey, Lipford, Jody W., Journal of Private Enterprise


In private markets with secure property rights, resources are continually reallocated through the process of market exchange. Land use, for example, constantly changes. Cropland is converted into residential subdivisions, wetlands are converted into retail establishment, and land once used for apartment dwellings may be converted into an office complex. The process is evolutionary, reflecting changes in the most highly valued use of real property. However, the process of land conversion, as well as new land use, may generate negative externalities, such as noxious fumes from a poultry-processing plant, excessive noise from an apartment complex and congestion from a strip mall.

Coase (1960) extends the application of market exchange to externalities by demonstrating that when transactions costs are sufficiently low and property rights are well-defined, enforced, and transferable, voluntary bargaining between the affected parties will lead to optimal resource use. The Coasian outcome may not result, however, if transactions costs are high (as may be the case when the number of parties to a transaction is large), affected parties engage in strategic bargaining, or information is asymmetrical (Polinsky, 1979).

Yet, the Coasian solution does apply to land use in the contemporary U.S. For example, Rinehart and Pompe (1998) show that market-driven, environmental decision-making by private developers protects coastal resources such as beaches. In addition, private parties have preserved land and prevented development by forming land trusts that hold over 17 million acres. According to Mulholland (2001), land trusts are becoming "the instrument of choice for those wishing to protect open space, farmland, watersheds, and other natural features of the landscape" (p. 1). Governments too are increasingly active purchasers of land for preservation. For example, governments in New Jersey, Pennsylvania, and Texas are using tax revenues, bond issues, and fees for municipal services to raise money to purchase undeveloped land.1

Governmental regulation of land use, which has a long history and wide application in the U.S., is often used as an alternative to private negotiation or purchase (Dowling, 2000, p. 881). A host of laws and regulations limit land use in order to control negative externalities such as habitat loss, pollution, and shoreline erosion. Simply put, the sticks in the bundle of rights to private property can be determined by and altered through the political process.

In recent years, concern about "urban sprawl" has led to increasing regulation of land use. The Sierra Club defines sprawl as "low-density development beyond the edge of service and employment, which separates where people live from where they shop, work, recreate, and educate-thus requiring cars to move between zones."2 The Brookings Institute defines sprawl "in terms of land resources consumed to accommodate new urbanization. If land is being consumed at a faster rate than population growth, then a metropolitan area can be characterized as 'sprawling'" (Fulton, et al, 2001, p. 3).

Whatever the definition, evidence of sprawl is compelling. The Brookings study of 281 metropolitan areas in the U.S. from 1982 to 1997 found that only 17 metropolitan areas became denser. Although U.S. population grew 17 percent over these years, urban land use expanded by 47 percent. Or, looked at in another way, "metropolitan density fell from 5.00 persons per urbanized acre in 1982 to 4.22 persons per urbanized acre in 1997" (Fulton, et al, p. 3).

The consequences of sprawl may include "increased traffic congestion, longer commutes, increased dependence on fossil fuels, crowded schools, worsening air and water pollution, lost open space and wetlands, increased flooding, destroyed wildlife habitat, higher taxes and dying city centers."3 Market motivated solutions such as those discussed above are possible. However, recently "smart growth" laws, which seek to protect open spaces, environmental amenities, and historical landmarks using policies such as minimum lot sizes, impact fees, and urban service boundaries, have become increasingly popular. …

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