The Completely Decentralized City: The Case for Benefits Based Public Finance

American Journal of Economics and Sociology, The, Jan, 2001 by Fred E. Foldvary

By definition, such sprawl is not a pure market outcome. Zoning contributes to sprawl, especially when it mandates a low density and precludes multiple-use real estate (Nelson 1977). Property taxes and government funding for public works also induce sprawl by creating dysfunctional land speculation. Speculation can serve a useful function in allocating goods over time and providing more buyers and sellers. But in cities today, government policy leads to inefficient and turbulent speculation. Government provides public works such as transit, streets, police and fire services, and schools. These services increase land rent and land values since the landowners pay only a small fraction of the cost. This constitutes a transfer of income from taxed workers to the landowners; developers thus become rent seekers. Speculators anticipate where the growth will be, accompanied or led by government-financed infrastructure. Lots held for speculation await higher prices, and so development leapfrogs over them to less expe nsive, further-away sites. Speculation can also induce malinvestments in real estate, buildings which turn out to be unprofitable. This especially occurs when monetary policy artificially makes interest rates low, leading to excessive investment in higher-order capital goods such as real-estate construction. Developers also expect a large part of their profits to come from increased land values. But those who build at the end of a real estate boom are left with vacancies, low rental income, and large loans to pay back (Foldvary 1997).

Cellular democracy and contractual communities would induce a more economical, since competition would induce a more rational system of financing public works and covenants would replace zoning. Association finance would follow the benefit principle, where those who benefit pay the costs. This would lead to a more compact development, since the profits from development would come from producing buildings and streets rather than from land values created by government works. Public utilities such as water would have a higher cost for users at the fringes who require longer piping and larger volumes from the source than do central-city users (Gaffney 1964).

D) Congestion

Since the streets and freeways in a city are free to the user, they tend to get overused during rush hour. A more compact development would ease the congestion with shorter distances and more urban transit, due to greater density. But also, privately provided thoroughfares would charge tolls which could vary according to congestion. Such peak-load pricing would reduce congestion. Some city associations might also provide public transit such as street cars, without excluding private alternatives such as vans and jitneys. The associations could fund the fixed cost from the rent assessments, since the transit increases rent, and users could pay the marginal costs.

While private streets are provided by many private communities and some firms run private toll roads, major avenues are typically operated at the city level. In St. Louis, however, some boulevards have been privately owned. An advantage of such ownership is the ability to control the utilities along the route (Beito and Smith 1990, p. 288).