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Sudha Shenoy, “Zoning and the market for property,” World Money Analyst, April 1980, p. 11. (With thanks to Mark Tier.)

Zoning is one of the most entrenched and “respectable” areas of government intervention. Upon examination — as with other forms of statism — we find that the market for land has its own checks and balances — without the corruption that always accompanies state intervention.

Zoning is necessary, or how else (it is said) could people prevent a glue factory from setting up in a residential suburb? Without zoning, businessmen would put up slaughter-houses next to ice-cream parlours. In this respect at least, state action has only beneficent effects, so the argument runs.

To argue that factories and family houses would exist side by side but for zoning, is to ignore costs involved. Housing sites are rarely suitable for industry, and vice versa. Factories need easy access to main transport routes. A factory often takes up more land than a family house because it needs space for deliveries and storage.

If a factory site was also suitable for housing, it might well support several houses and blocks of flats. Total return from developing the land for residential purposes would far exceed that from using the land as an industrial site. So too if the land were more suited to industry than to housing. Developers would hardly try to build family houses or blocks of flats near a busy main road with good connections to other cities, easy access to railway sidings, and ample supplies of water for industrial purposes. Such a site would rather be turned to industrial use.

Commercial and office buildings, restaurants and snack bars, cinemas and department stores are usually built on main roads, where they are accessible to the largest number of people. Builders and landlords would otherwise fail to make the necessary returns from their activities.

Blueprint
Zoning is simply unnecessary in many cases. Costs and demand interact to produce a certain orderliness of location. Does this mean that the zoning activity of officials is an empty exercise? Hardly: the political and administrative apparatus does have consequences, often the opposite of those intended.

In theory, zoning requires a comprehensive blueprint showing the various uses permitted for land. But the real world is not controlled by such a master plan. As circumstances change, so do the appropriate uses to which different sites could be put. Any town plan is soon rendered obsolete by such events. Much urban land is not put to its most appropriate uses, i.e., those that would help to produce goods and services at least-cost. Due to changing circumstances, the town planner is faced with a large number of applications for specific exemptions from (or modifications to) the zoning regulations. In most cases, these applications are granted. But it does not follow that the exceptions allowed are those that would help to produce whatever is produced at least cost.

That value of a site varies according to its zoning classification. Adjacent sites may differ considerably in value if one is classified (say) for commercial use and the other is not. Reclassification could lead to considerable changes in land values. Again, it does not follow that the capital gains and losses made thereby exactly coincide with those that would lead to production at least cost. But it does follow that officials can often strongly influence the value of a particular piece of land.

Zoning regulations often specify the intensity with which urban land may be used such as, the height of buildings and/or the ratio of floor space to site area. These regulations do not necessarily result in exactly that degree of intensity of use which would minimise production costs. But many landlords may well be protected against competition.

Semi-monopoly
In many cases (e.g. new housing developments) zoning officials effectively specify the number and range of businesses that may be opened. They may refuse permission for a new cafe, boutique or grocer’s shop because “there are too many already,” or they may allow only some types of shops or businesses, but not others. Many small businesses are thus awarded a semi-monopoly (unwittingly or otherwise).

Zoning gives considerable discretion to zoning officials over the use of valuable urban land. We should not be surprised therefore to hear of their corruptibility. But those most adept at manipulating the zoning machinery are not necessarily the most efficient producers.

In affluent suburbs, zoning regulations often prevent the construction of more and inexpensive housing: for example, by prescribing the minimum number of rooms in a house, or the maximum number in a flat, or the minimum site area for a house. By reducing the intensity of land use, such regulations lead to more land being used for urban purposes than would otherwise be the case. More importantly, they increase the cost and reduce the supply of housing. The capital value of housing assets, especially in the more affluent suburbs, is artificially maintained at a high level.

Zoning regulations also prevent lower income families from moving up the housing ladder. Every move by a family into a new house releases more housing for those with lower incomes. When this market process is slowed down, it is those with lower incomes who suffer most.

In scenic coastal areas, middle-class environmentalists often battle to prevent or reduce further housing development. Costs of thus reducing the supply of new housing are borne by lower income families who must now continue in inferior housing. The cost of preserving the environment for those already in a position to enjoy it, is imposed (via the political process) on those with lower incomes elsewhere.

Zoning to protect the environment is the modern equivalent to game legislation in the past under which peasants were forbidden to kill the deer and pheasant that ate their crops, to preserve the noblemen’s hunting sport.

No zoning
Some North American cities have no zoning regulations whatever. Houston (Texas) is perhaps the best-known. In Houston, far from finding chaos in land use, one finds perhaps more orderliness than in many other cities. Residential, commercial and industrial districts exists in the areas most suited to such uses (many industrial plants are even sited with regard to prevailing wind patterns).

In many Houston residential areas, a system of covenants has developed, restricting by contract the uses to which these sites can be put. The advantage here is that these covenants may be altered, removed or even newly introduced, according to circumstances and home-owners’ wishes. All three such changes have in fact occurred in different areas at different times.

Large scale commercial developments have proceeded by means of options taken out by the developers on houses or other building in the area, as required by their projects. (In many cases these developments although desirable would have been impossible elsewhere because of zoning regulations.) Thus sites have been put to different uses with changing circumstances, with a minimum of disruption.

In sum, zoning is simply another example of state intervention which promotes inefficiency, protects established interests, and therefore penalises those who can least afford it: the poor.

(in order of appearance on Economics.org.au)
  1. Government: the fastest growth area
  2. Zoning and the market for property
  3. What minimum wage laws really do
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