Over the weekend, roughly 25 urban economists gathered in Atlanta for a PERC conference on free market environmentalism and the city. I served as a co-organizer along with GSU's Spencer Banzhaf. Ed Glaeser gave a great keynote dinner talk. While I have been listening to him speak for almost 30 years now, I always learn from what he has to say.
Cities pose challenges for Coasians. In the typical Coasian setting, there are a set of adjacent land owners and one takes an action that impacts a neighbor. The actor who “causes the cause” and the actor who feels the “effect” both recognize that they are in a 1 to 1 relationship. If the property rights to taking an action are well defined, then the two can figure out what is the configuration of their relationship that maximizes their mutual gains. For example, if one cattle rancher's livestock walk onto my property to eat and they mash my flowers. It may be optimal for me to let them do this but I will seek compensation from the other rancher.
In the city, there isn't such a clean “1 to 1 function”. There are millions of polluting cars, thousands of polluting point sources, common property and millions of potential victims. How can externalities be tamed in such a context?
While papers presented a the conference addressed many issues ranging from a city's carbon footprint, to pricing Lexus Lanes on highways, to the long run growth implications of Chicago zoning to the long run cross-county growth implications of reducing yellow fever risk in the U.S in the 19th century, there were some key discussions about the fight over property rights.
In economics, we often assume that “property rights” (i.e who owns what) are already established and then trading occurs. But, much of politics focuses over who has “the property right”. There is a negotiations game before the Coasian negotiations game.
We also discussed the challenge of mitigating externalities in growing LDC cities. In areas where mayors are not up to the job of protecting the urban poor, will Julian Simon's optimism about human ingenuity win out? Will profit seeking entrepreneurs dream up solutions or does the public sector have a monopoly on delivering quality of life? If the public sector has such a monopoly, and corrupt officials refuse to do their jobs , then “the people” will suffer greatly. Offsetting this pessimism is the possibility that demand creates supply and in a world where ideas are public goods that we simply need to increase the count of cities and neighborhoods in LDCs and let people vote with their feet in this smartphone age in which people are informed about alternatives.
The political economy of urban development is a terrific field. Do mayors have incentives to be “pro-poor”? When economists identify Hicksian Pareto Improvements, will the winners actually compensate the losers for the policy shift? Or since the losers anticipate that they won't be compensated, they rationally block the policy shift? Do mayors have incentives to experiment with new policy proposals and to evaluate their effectiveness? Is there sufficient policy experimentation by urban mayors? Are mayors rewarded for adopting efficiency enhancing policies? Are environmental improvements sufficiently valued by the non-elites such that in a democracy these median voters who support a leader who delivers “green” public goods?