EPA-600/5-77-001
February 1977
Socioeconomic Environmental Studies Series
ECONOMIC INCENTIVES FOR LAND USE CONTROL
Office of Air, Land, and Water Use
Office of Research and Development
U.S. Environmental Protection Agency
Washington D.C. 20460
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RESEARCH REPORTING SERIES
Research reports of the Office of Research and Development, U.S. Environmental
Protection Agency, have been grouped into five series. These five broad
categories were established to facilitate further development and application of
environmental technology Elimination of traditional grouping was consciously
planned to foster technology transfer and a maximum interface in related fields
The five series are:
1. Environmental Health Effects Research
2. Environmental Protection Technology
3. Ecological Research
4. Environmental Monitoring
5. Socioeconomic Environmental Studies
This report has been assigned to the SOCIOECONOMIC ENVIRONMENTAL
STUDIES series. This series includes research on environmental management,
economic analysis, ecological impacts, comprehensive planning and forecast-
ing, and analysis methodologies. Included are tools for determining varying
impacts of alternative policies; analyses of environmental planning techniques at
the regional, state, and local levels; and approaches to measuring environmental
quality perceptions, as well as analysis of ecological and economic impacts of
environmental protection measures. Such topics as urban form, industrial mix,
growth policies, control, and organizational structure are discussed in terms of
optimal environmental performance. These interdisciplinary studies and systems
analyses are presented in forms varying from quantitative relational analyses to
management and policy-oriented reports.
This document is available to the public through the National Technical Informa-
tion Service, Springfield, Virginia 22161.
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EPA-600/5-77-001
February 1977
ECONOMIC INCENTIVES FOR LAND USE CONTROL
By
Frederick H. Rueter
Phillip Kushner
• • v^i,'-1*/ .**
' " •*-' -•,' '< ';
'"--';- r-'.N .?> -..--
Contract Number 68-01-2699
Project Officer
Richard K. Schaefer
Office of Air, Land, and Water Use
Prepared for
OFFICE OF RESEARCH AND DEVELOPMENT
U. S. ENVIRONMENTAL PROTECTION AGENCY
WASHINGTON, D.C. 20460
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DISCLAIMER
This report has been reviewed by the Office of Research and
Development, U.S. Environmental Protection Agency, and approved for
publication. Approval does not signify that the contents necessarily
reflect the views and policies of the U.S. Environmental Protection
Agency, nor does mention of trade names or commercial products constitute
endorsement or recommendation for use.
ii
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FOREWORD
The basic premise of land use controls is to reduce the effect
of noncompensated, negative externalities that one land owner might
inflict on others. Individuals in an effort to avoid the negative
externalities that might be inflicted on them, have established various
property rights and legal restrictions through the political process.
These rights and restrictions have developed to promote economic
efficiency and equity. Questions arise, however, as to the relative
economic efficiency and equity of traditional prescriptive land use
controls and to the potential economic effects of using controls based
on economic incentives. This report primarily reviews and addresses
these questions from a theoretical economics viewpoint.
This report was purposely directed towards theoretical aspects in
order to form a solid base for further land use management and
implementation strategies research. The conclusions of this theoretical
research help to establish reasonable bounds on the types of land use
management strategies that may economically internalize land use
externalities.
The Environmental Management program of the Office of Air, Land
and Water Use is directed toward improving the capabilities of state,
regional, and local governments for instituting and managing environmental
programs. It does this by providing them with improved information and
methods for identifying and describing alternative solutions to specific
environmental problems and for selecting and implementing the best
solution.
The program considers four fundamental functions performed by
public administrators: planning, evaluation, implementation, and
enforcement. It emphasizes intermedia and secondary effects of
environmental management actions, implementation incentives and
institutional arrangements, and consideration of the complete range
of implementation measures, and public education programs, as well as
the traditional regulatory mechanisms.
iii
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ABSTRACT
This report performs a theoretical economic analysis of the
incentives embodied within a variety of existing and proposed land use
control techniques and, then, employs this analytical framework to
examine the social desirability of supplementing or replacing the exist-
ing body of land use control mechanisms with any of several innovative
policies for the regulation of the use of land. Thus, this report first
investigates the economic and legal relationships between alternative
assignments of property rights in the use. of resources and the levels
of external effects attributable to the use of these resources. Then,
the administrative, legal, economic, and political limitations of the
traditional land use control mechanisms of municipal zoning, subdivision
regulation, building codes, and eminent domain condemnation are
examined. Next, a set of basic concepts is developed for the evaluation
of the potential economic efficiency and social desirability of any mecha-
nism for the optimal control of external effects or the optimal pro-
vision of public facilities. Finally, using these concepts, the potential
economic efficiency, legal feasibility, administrative tractability,
political acceptability, and social desirability of implementing several
innovative and, as yet, relatively untried land use control mechanisms
are assessed.
iv
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TABLE OF CONTENTS
1.0 INTRODUCTION AND EXECUTIVE SUMMARY
2.0 THE RELATIONSHIPS BETWEEN PROPERTY
RIGHTS AND EXTERNALITIES
2. 1 Economic Relationships Between 2. 1
Property R ights and Externalities
2.1.1 The Resource Allocation Implications 2.3
of Communal Ownership
2.1.2 The Re source Allocation Implications 2.5
of Private Ownership
2.1.3 The Traditional Solution 2.8
2. 1. 4 The Coase Theorem 2. 9
2.1.5 Equity Conside rations 2.13
2. 1. 6 Allocative Neutrality and the 2. 15
Distribution of Income
2.1.7 Allocative Ne utrality and the 2.17
Symmetry of Liability Rules
Z.I. 8 The Need for Bi-Lateral Payments 2.20
2. 1. 9 Transaction Costs and Allocative 2. 22
Neutrality
2. 1. 10 Differential Transaction Costs 2.23
and Alternative Liability Rules
2.1.11 Criteria for Choosing the Optimal 2.24
Internalization Mechanism
2. 1. 12 Implications for the Selection of 2.29
Specific Internalization Mechanisms
2.1.13 Synthesis 2.34
2.2 Legal Relationships Between Property 2.34
Rights and Externalities
2.2.1 Externalities, Environmental 2.36
Quality and Nuisance Law
2.2.2 The Inherent Conflict: Taking 2.45
Versus the Police Power
2.2.3 Synthesis 2.52
2.3 Conclusions 2.52
v
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TABLE OF CONTENTS (cotit'd)
3.1.1
3. 1.2
3.1.3
3. 1.4
3.1.5
3.1.6
3. 1.7
3.1.8
3.1.9
Eminent
3.2.1
3.2.2
3.2.3
3.2.4
3.2.5
The Nature of Municipal Zoning
Judicial Review
Techniques to Provide Flexibility
in Zoning
Impermissible Zoning Techniques
Expanding Environmental Criteria
for Zoning
Structural Limitations of Zoning
Administrative Problems in Zoning
Political Problems in Zoning
Economic Problems in Zoning
Domain
The Nature of Eminent Domain
The Public Use Concept
The Concept of Just Compensation
The Measurement of Just
Compensation
Procedural Considerations
3.0 A CRITIQUE OF TRADITIONAL AND
USE CONTROL MECHANISMS
3. 1 Municipal Zoning 3. 1
3.1
3.4
3.5
3.7
3.8
3. 10
3. 12
3.25
3.28
3.2 Eminent Domain 3.31
3.31
3.33
3. 38
3.47
3.50
3.3 Conclusions 3.53
4.0 ENVIRONMENTAL QUALITY AND THE OPTIMAL 4. 1
CONTROL OF MARKET FAILURE
4. 1 Externalities 4. 1
4.1.1 The Possibility of Resolution 4.3
by Negotiation
4.1.2 The Appropriate Nature and Role 4.9
of Public Policy
4.1.3 Synthesis 4.24
4.2 Public Goods 4.25
4.2.1 The Inefficiency of Decentralized 4.27
Provision of Public Goods
4.2.2 The Centralized Provision of 4.28
Public Goods
vi
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TABLE OF CONTENTS (cont'd)
Page
4.2.3 Exclusion and the Centralized 4.30
Provision of Public Goods
4.2.4 Synthesis 4.32
4.3 Increasing Returns to Scale 4.32
4.3.1 ' The Impossibility of Perfect 4.34
Competition
4.3.2 The Inefficie'ncy of Unregulated 4.36
Monopoly
4.3.3 Optimal Regulation of Natural Monopoly 4.38
4. 3. 4 Practical Regulation of Natural Monopoly 4. 38
4.3.5 Synthesis 4.43
4.4 Conclusion 4.43
5. 0 AN EVALUATION OF THE POTENTIAL SOCIAL 5. 1
DESIRABILITY OF ALTERNATIVE LAND USE
CONTROL MECHANISMS
5.1 Ad Valorem Taxation Conditional Upon Land Use 5.2
5. 1. 1 Expected Deviations from Social 5. 5
Optimality
5.1.2 Information Requirements and Informa- 5.7
tion-Retrieval Considerations
5.1.3 Potential Inequities, Abuses, and 5.11
Enforcement Problems
5.1.4 Legal Constraints and Political 5.13
Acceptability
5. 1.5 Expected Impact on Land Use Patterns 5. 15
5.2 Annual "Externality" Fees 5.16
5.2.1 Expected Deviations from Social 5.17
Optimality
5.2.2 Information Requirements and Informa- 5.19
tion Retrieval Considerations
5.2.3 Potential Inequities, Abuses, and 5.22
Enforcement Problems
5.2.4 Legal Constraints and Political 5.24
Acceptability
5.2.5 Expected Impacts on Land Use Patterns 5.25
vli
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TABLE OF CONTENTS (cont'd)
5.3 Lump-Sam Payment for Externalities Prior 5.26
to Change in Permissible Land Use Status
5. 3. 1 Expected Deviations from Social 5. 29
Optimality
5.3.2 Information Requirements and Informa- 5.31
tion Retrieval Considerations
5.3.3 Potential Inequities, Abuses, and 5.35
Enforcement Problems
5.3.4 Legal Constraints and Political 5.38
Acceptability
5.3.5 Expected Impacts on Land Use Patterns 5.39
5.4 Publicly Negotiated Settlement Among All 5.40
Affected Parties
5.4.1 Expected Deviations from Social 5.42
Optimality
5.4.2 Information Requirements and Informa- 5.46
tion Retrieval Considerations
5.4.3 Potential Inequities, Abuses, and 5.48
Enforcement Problems
5.4.4 Political Acceptability 5.52
5.4.5 Expected Impacts on Land Use Patterns 5.53
5.5 Public Purchase of Scenic or Environmental 5,55
Easements
5. 5. 1 Information Requirements and Informa- 5. 55
tion Retrieval Considerations
5.5.2 Expected Deviations from Social 5.59
Optimality
5.5.3 Potential Inequities, Abuse.s, and 5.64
Enforcement Problems
5.5.4 Legal Constraints and Political 5.67
Acceptability
5.5.5 Expected Impact on Land Use Patterns 5.68
5.6 Landowner Development Corporations 5.68
5.6.1 Information Requirements and Expected 5.70
Deviations from Social Optimality
5.6.2 Potential Inequities, Abuses, and 5.72
Enforcement Problems
viii
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TABLE OF CONTENTS (cont'd)
5.6.3 Legal Constraints and Political 5.75
Acceptability
5.6.4 Expected Impacts on Land Use Patterns 5.76
5.7 Required Payment by New Developments of Full 5.77
Additional Cost of all Public Facilities
5.7.1 Information Requirements 5.78
5.7.Z Expected Deviations from Social 5.83
Optimality
5.7.3 Potential Inequities, Abuses, and 5.84
Enforcement Problems
5.7.4 Legal Constraints and Political 5.85
Acceptability
5.7.5 Expected Impacts Upon Land Use Patterns 5.90
5. 8 The Most Appropriate Level of Government 5. 91
to Implement Any Policy
5.9 Conclusions and Recommendations 5.94
6.0 BIBLIOGRAPHY 6.1
6.1
6.2
6.3
Literature
Legal Cases
Other References
6. 3. 1 Market Failure
6.3.2 Property R ights
6.3.3 Land Use and Land Value Models
6.3.4 Municipal Zoning
6.3.5 Eminent Domain and Compensation
6. 3. 6 Property Tax
6.3.7 Land Use Planning and Controls
6.3.8 Urban Redevelopment and Renewal
6. 3. 9 Economics of Regulation
6.3. 10 Pricing and Resource Allocation Policies
6.3. 11 Social Choice
6. 3. 12 State and Local Public Expenditures
6.3.13 Federalism
6.1
6.12
6. 16
6. 16
6. 39
6.41
6.49
6.52
6.55
6.62
6.69
6.73
6.77
6.87
6. 97
6. 101
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1.0 INTRODUCTION AND EXECUTIVE SUMMARY
If the characteristics of the market for real property were in
complete conformity with the assumptions of perfect competition, there
would exist no economic justification for the imposition of land use
controls upon this market. Rather, it could reasonably be expected
that the unregulated market would function in such a manner than an
economically efficient pattern of development would be achieved.
Moreover, in many ways the market for real property is described
satisfactorily by the assumptions of perfect competition. In
general, the market embraces a large number of independent buyers
and sellers, none of whom exerts any substantial control over market
prices. Reasonably accurate information concerning the availability
and asking prices of properties is readily available from real estate
agents and classified advertisements. Finally, entry into and exit from
the market is reasonably free, although transaction costs may be sig-
nificant in many instances.
However, even when property is undeveloped it is not perfectly
homogeneous; and after development its heterogeneity becomes even
more pronounced. In addition, the real property market is subject to
a high degree of interdependence. There exist among various types of
land uses certain uncompensated externalities (e.g., air and water
pollution, noise, congestion, aesthetic conflicts) which prevent the
unrestricted market from achieving economic efficiency. Similarly,
interdependencies exist between the economically efficient development
of private property and the economically efficient provision of public
facilities (e.g., water, sewerage, streets and highways) to serve pri-
vate land use activities.
Consequently, the political process has intervened in the market
for real property both to protect property owners against the potential
erosion of their wealth and to promote economic efficiency in the pro-
vision of public facilities. Historically, this political intervention has
consisted of the enactment and implementation of such mechanisms as
municipal zoning processes, subdivision regulations, building codes,
and eminent domain condemnation procedures.
Undeniably, these land use controls have had substantial impacts
upon the patterns of development of real property which have been
attained throughout the nation. However, because these controls have
1.1
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incorporated numerous unintended economic incentives, many of their
impacts have, in many situations, been inconsistent with the attain-
ment of economic efficiency.
To aid in understanding the rationality of the behavior patterns
which have produced these unanticipated and, frequently, undesired
impacts and to provide a conceptual basis for the establishment of im-
proved land use controls to supplement or supplant the traditional
mechanisms, this report develops a theoretical economic analysis of
the incentives embodied in public regulatory policies. Then, taking
into consideration the practical legal constraints which the existing
body of legislation and judicial interpretations imposes upon the feasi-
bility of implementing particular regulatory policies, the report applies
this theoretical economic analysis to the evaluation of a variety of
existing and proposed land use control mechanisms.
Specifically, Chapter 2.0 investigates the economic and legal
relationships between the assignment of property rights in any situation
and the nature and extent of the externalities which exist in that situa-
tion. This investigation demonstrates that:
The establishment of private property rights generally
produces a greater internalization of externalities than
is produced by the establishment of communal property
rights because, somewhat paradoxically, private prop-
erty rights encourage people to take greater account
of social costs.
The market resolution of any externality situation will
be both economically efficient and allocatively neutral
with respect to the assignment of property rights if
the income elasticity of demand is zero in all markets
(including the market for the external effect) and i[
the costs of negotiating and enforcing transactions are
zero.
In realistic externality situations, the attainment of
the socially most desirable allocation of resources
will not be independent of the assignment of property
rights. Rather, because of equity considerations,
differences in the objectives of the various individuals
involved in the situation, differences in the availability
of relevant information under alternative assignments
1.2
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of property rights, differences in the number of
individuals involved in different situations, the exis-
tence of substantial transaction costs, and differences
in the transaction costs associated with alternative
assignments of property rights, the social desirability
of the market resolution of any realistic externality
situation will be inextricably related to the assign-
ment of property rights established in that situation.
There exists no single assignment of property rights
which uniformly constitutes the socially most desir-
able assignment of property rights in all externality
situations. The socially most desirable assignment
of property rights for any particular externality
situation can only be determined on the basis of a
careful evaluation of the relative strengths and weak-
nesses of all feasible alternative assignments of prop-
erty rights in that s ituation.
Neither the existing body of private nuisance law,
as interpreted by the courts today, nor the prevailing
judicial reconciliation of the inherent conflict between
the police power of the state and the private citizen's
right to just compensation for the confiscation of his
property appropriately provides for the internalization
of all externalities.
The legal remedy of totally prohibiting the production
of an externality (i. e. , injunctive relief) generally
constitutes an inefficient resolution of an externality
situation, since it is incapable of distinguishing
between land uses which are able to pay their total
social cost and land uses which are unable to pay this
cost.
Next, Chapter 3. 0 examines the administrative, economic, judi-
cial, legal, and political problems which arise in the application of
traditional land use control mechanisms. This examination, which
focuses primarily upon municipal zoning processes and eminent domain
procedures, demonstrates that:
Because of legal and judicial restrictions upon the
application of municipal zoning controls in certain
1.3
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situations, structural limitations upon the effective-
ness of municipal zoning, administrative difficulties
in the implementation of municipal zoning processes,
undesirable political influences in municipal zoning
processes, and unanticipated or unintended economic
problems embodied in or arising from the application
of municipal zoning controls, municipal zoning is
incapable, in practice, of promoting the internaliza-
tion of all externalities.
In numerous instances, the inequities and inefficien-
cies which result fro"m the inappropriate application
of municipal zoning controls are intensified by the
simultaneous inappropriate application of comple-
mentary land use control techniques, such as sub-
division regulations and building codes.
Prevailing legal and judicial restrictions upon both
the range of application of the power of eminent
domain and the procedures which must be employed
in performing eminent domain condemnation cause
the exercise of the power of eminent domain to be
incapable of promoting the economically efficient
provision of public facilities in all situations.
In addition, prevailing legal, and judicial interpreta-
tions of the concept of just compensation, combined
with the unavoidable reliance upon subjective judg-
ment in the measurement of just compensation,
causes the exercise of the power of eminent domain
to impose severe inequities upon some individuals
in some situations.
Despite the demonstrated weaknesses of municipal
zoning processes, subdivision regulations, building
codes, and eminent domain condemnation procedures
as mechanisms for the regulation of real property,
it cannot be concluded that any or all of these land
use control techniques should be abolished, replaced,
or modified. Before any of these conclusions can
be reached, it must be demonstrated that, in the
particular externality situation under consideration,
the allocation of activities to parcels of land can be
1.4
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performed more satisfactorily either by the unregulated
market, by some other land use control mechanism,
or by modified versions of the existing land use control
techniques.
Chapter 4.0 identifies and describes the problems which arise in
the attainment of economic efficiency and the achievement of the socially
most desirable allocation of resources when externalities, public goods,
or increasing returns to scale prevail in any particular market. In
addition, analyses of the effectiveness of the various public policies
which might be employed to resolve these problems of market failure
in specific situations are performed. These analyses demonstrate that:
There exists no single mechanism for the internaliza-
tion of externalities which uniformly constitutes the
socially most desirable internalization mechanism in
all externality situations. Rather, for any particular
externality situation, the determination of the most
appropriate internalization mechanism can only be
performed on the basis of a careful examination of
the relative strengths and weaknesses of all feasible
alternative internalization mechanisms in that situa-
tion. Thus, in different externality situations, the
socially most desirable internalization mechanisms
might include the voluntarily negotiated resolution
of the externality situation by all affected individuals,
the imposition of unilateral or bilateral taxes or sub-
sidies, the specification of minimum standards of
acceptability, the establishment of markets for the
exchange of rights to produce externalities, or the
merger of affected resource owners into "natural"
decision-making units.
Although charging a zero price for the consumption
of a public good will promote the attainment of eco-
nomic efficiency in the consumption of the good, the
adoption of this policy will preclude the attainment
of economic efficiency in the production of that good,
in particular, and all goods and services, in general.
Conversely, although charging a positive price for
the consumption of a public good will necessarily
restrain society from the attainment of economic
efficiency in the consumption of goods and services,
1.5
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the adoption of this policy will provide valuable infor-
mation for the determination of the economically effi-
cient rate of production of the good. Therefore, the
evaluation of the social desirability of charging any
particular price for the consumption of any public
good should be based on a careful comparison of the
costs and benefits which will be obtained by society
if that pricing policy is adopted.
Theoretically, to promote economic efficiency in the
provision of a good produced under conditions of
increasing returns to scale, the price of the good
should be set equal to the marginal cost of producing
the good and, then, the operating losses of the pro-
ducer of the good should be financed through a system
of lump sum taxes. However, in realistic situations,
the unavailability of relevant information and the
absence of appropriate taxation mechanisms may
cause the charging of a price equal to the average
cost of producing the good or the adoption of a multi-
part pricing system to be socially more desirable
than the theoretically optimal pricing and taxation
mechanism. In each situation, it is necessary to
compare the relative advantages and disadvantages
of all potentially applicable policies before selecting
any specific policy for implementation.
Although there exists no single public policy which
is uniformly socially most desirable for the control
of any of the preceding types of market failure, there
does exist a single analytical framework which is
universally appropriate for the comparison of the
strengths and weaknesses of alternative policies -- the
analytical framework of cost-benefit analysis.
Finally, Chapter 5.0 investigates the possibility that some alter-
native regulatory policies might be capable of producing patterns of
development which are socially more desirable than the patterns of
development which are produced by the traditional regulatory mecha-
nisms of municipal zoning, subdivision regulation, building codes,
and eminent domain condemnation. Specifically, for each of seven
innovative and, as yet, relative untried regulatory policies, this investi-
gation examines the information requirements and information retrieval
1.6
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considerations associated with the policy; the potential inequities,
abuses, and enforcement .problems which are likely to arise with the
policy; the legal constraints and political considerations which might
limit the applicability of the policy; the expected impact of the policy
on land use patterns; the extent to which the policy promotes the attain-
ment of the socially most desirable pattern of development; and the
most appropriate level of government to implement the policy. The
policies which are examined include: a policy of ad valorem property
taxation with tax rates conditional upon land use, a policy requiring the
payment of annual "externality" fees to the government by the owners
of property upon which external effects are generated, a policy provid-
ing for the transfer of a lump-sum payment for externalities whenever
the permissible land use status of any property is changed; a policy of
convening public hearings to promote negotiated settlements of exter-
nality problems among all individuals who are affected by these prob-
lems; a policy of purchasing scenic or environmental easements; a
policy encouraging the formation of landowner development corporations;
and a policy requiring the owners of new developments to pay the full
additional cost of all expansions of public facilities which must be pro-
vided to serve these new developments. Relative to these policies, the
investigation demonstrates that:
The implementation of a policy of ad valorem prop-
erty taxation with tax rates conditional upon land use
generally will be socially undesirable because any
realistic policy of this type can be expected in many
instances to provide perverse incentives to property
owners and, consequently, in most situations to pro-
duce patterns of development which are less satis-
factory than the patterns of development which would
have been produced by alternative policies.
It generally will be socially undesirable to implement
a policy requiring the transfer of lump-sum payments
for externalities prior to changes in the permissible
land use status of properties because of the extreme
volume of information required for the formulation
of a policy of this type, the substantial practical and
theoretical difficulty associated with assembling this
body of information, and the limited opportunity to
adjust the structure of payments embodied in this
policies in response to initial errors in the specifica-
tion of payments or changes in the characteristics
of externality situations.
1.7
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Public hearings involving all individuals who are
affected by particular externalities are likely to be
successful in promoting negotiated settlements of
these externality problems only in situations which
involve only a small number of individuals -- situa-
tions in which private negotiations are also reason-
ably likely to produce mutually agreeable settlements
without governmental intervention. However, in
externality situations involving large numbers of
individuals, it is extremely likely either that no
negotiated settlement will be attained or, if less than
the unanimous consent of all affected individuals is
required for the adoption of a settlement, that the
pattern of development which is attained will be less
socially desirable than the patterns of development
which would have been produced by alternative poli-
cies.
The adoption of a policy encouraging the formation
of landowner development corporations will virtually
inevitably be socially undesirable because the forma-
tion of a landowner development corporation which is
sufficiently comprehensive to control effectively the
externalities which arise among private land uses in a
geographic area necessarily will provide to the share-
holders of this corporation substantial monopoly control
over the development and use of land in this area.
Regulation of the corporation's exploitation of this
monopoly power will be at least as difficult as the
direct regulation of the externality situation using an
alternative control policy.
Both the imposition of annual "externality" fees and the
public purchase of scenic and environmental easements
offer sufficient flexibility in their tax and subsidy struc-
tures at any point in time and sufficient adaptability of
these structures over time to present the possibility
that the implementation of these policies will produce
increases in the social desirability of the pattern of
development in a geographic area which are large
enough to justify incurring the costs of developing and
implementing these policies.
1.8
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A policy which attempts to require the owners of new
developments to pay the full additional cost of all
expansions of public facilities which must be provided
to serve their developments should cause these prop-
erty owners to bear a sufficiently larger portion of this
full additional cost than they bear under the prevailing
methods of financing the provision of expansions of
public facilities to produce an improvement in the
pattern of development in a geographic area which is
sufficiently great to justify incurring the costs of
formulating and implementing this pricing policy.
Nevertheless, before any unqualified recommendation can be
advanced concerning the social desirability of adopting any of these
policies, additional research must be performed to evaluate the precise
administrative requirements, political acceptability, *md information
processing needs of each of the policies.
Chapter 6. 0 contains an extensive bibliography of the literature
relevant to the issues addressed in this report.
1.9
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2. 0 THE RELATIONSHIPS BETWEEN
PROPERTY RIGHTS AND EXTERNALITIES
Externalities arise when the production or consumption opportuni-
ties of individual members of society are directly affected by the
resource allocation decisions of other members of society or, stated
somewhat differently, when the exercising of acknowledged property
rights by some individual members of society directly affects the pro-
fits or satisfaction which can be obtained by other members of society
from the exercising of their acknowledged property rights. Thus, in
virtually any realistic externality situation, a clear relationship will
exist between the assignment of property rights which is established
in this situation and the nature and extent of the externalities which pre-
vail in the situation.
This chapter investigates the structure of this relationship.
Specifically, Section 2. 1 analyzes the economic aspects of the relation-
ship between property rights and externalities; while Section 2.2 ex-
amines the prevailing and emerging judicial interpretations of the legal
aspects of this relationship. Finally, Section 2. 3 presents some
general conclusions concerning the implications of these economic
and legal analyses for the development of public policies for the control
of externalities.
2. 1 Economic Relationships Between
Property Rights and Externalities
While economists traditionally have visualized the market mech-
anism as a process in which goods or services are exchanged by indi-
viduals, a more accurate representation of this mechanism would
recognize that the items which actually are exchanged in the market
are the rights to the possession and use of these goods and services.
Thus, a market transaction essentially consists of an exchange of two
bundles of property rights; and the value which is attached to any good
whose ownership is modified by a market transaction depends crucially
on the particular bundle of property rights to the possession and use of
that good which is conveyed in that transaction.
In adopting this representation of the market exchange process,
it is important to recognize that:
2. 1
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". . .property rights do not refer to relations between men
and things, but, rather, to the sanctioned behavioral rela-
tions among men that arise from the existence of things
and pertain to their use. Property rights assignments
specify the norms of behavior with respect to things that
each and every person must observe in his interactions
with other persons, or bear the cost for nonobservance.
The prevailing system of property rights in the com-
munity can be described, then, as the set of economic and
social relations defining the position of each individual
with respect to the utilization of scarce resources. "#
To obtain a thorough appreciation of the practical significance of
the distinctions which are drawn in this definition, it is useful to con-
sider the implications for resource allocation of two polar forms of
property right ownership: communal ownership and private ownership.
Under communal ownership, ". . .the comrmmity denies to the state or
to individual citizens the right to interfere with any person's exercise
of communally-owned rights;" while, under private ownership, ". . .
the community recognizes the right of the owner to exclude others from
exercising the owner's private rights. "#*
*Furubotn and Pejovich (43), p. 1139. An essentially identical
although less formal, definition of property rights appears in Demsetz
(38), p. 347, where it is stated: "Property rights are an instrument of
society and derive their significance from the fact that they help a man
form those expectations which he can reasonably hold in his dealings
with others. . . . An owner of property rights possesses the consent of
fellowmen to allow him to act in particular ways. An owner expects
the community to prevent others from interfering with his actions,
provided that these actions are not prohibited in the specification of
his rights. . . . It is clear, then, that property rights specify how per-
sons may be benefited and harmed, and, therefore, who must pay
whom to modify the actions taken by persons. "
*#Demsetz (38), p. 354. In this article, Demsetz also distin-
guishes a third basic form of ownership; state ownership. Under state
ownership, ". . .the state may exclude anyone from, the use of a right
as long as the state follows accepted political procedures for deter-
mining who may not use state property. " Detailed consideration of the
resource allocation implications of this form of ownership will contri-
bute very little to the analytical content of this report and, consequently,
will not be pursued here.
2.2
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This change in the type of product which users of a particular
resource choose to produce when the resource is communally-owned
rather than privately-owned necessarily is associated with a change
in the composition of private investment inputs, although it is impos-
sible to determine a priori whether the total value of private invest-
ment will increase or decrease. Nevertheless, it is certain that, for
any degree of competition, the economic rent of a resource will dis-
sipate more rapidly when that resource is communally-owned than when
it is privately-owned, since private ownership will induce the choice
of that product whose production will maximize the economic rent of
the resource.
Although this discussion of the implications of communal owner-
ship for resource allocation is far from exhaustive, it clearly demon-
strates that this form of ownership creates situations in which exter-
nalities abound. Thus, the production and consumption opportunities
of individual members of the community are directly affected by the
resource allocation decisions of other members of the community --
decisions over which the externally affected individuals have no con-
trol. Moreover, these external effects are not attributable to the
changes in the equilibrium set of market prices which occur as the
economy adjusts to changes in supply and demand conditions. Finally,
these modifications of production and consumption opportunities do not
arise from the performance of malicious actions by the other com-
munity members, but are produced only incidentally by these individ-
uals in their pursuit of legitimate activities.
While these externalities conceivably can be mitigated if all mem-
bers of the community mutually agree to restrict the exercising of their
rights to the communally-owned resource and, hence, to curtail the
rate at which each of them utilizes this resource, the negotiation and
maintenance of an agreement of this type is extremely unlikely. Since
each individual who declines to agree to restrict his use of the resource
has the right to utilize the resource as intensively as he desires, there
is little incentive for any member of the community to enter into a
mutual accord. This inclination is reinforced by the knowledge that,
if any group of individuals within the community does agree to limit
their use of the resource, all of the cost associated with their foregone
present utilization of the resource is incurred by the members of this
group; while most, if not all, of the benefits associated with the in-
creased present and future availability of the resource accrues to those
2.4
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members of the community who have not joined in the agreement. *
Similarly, since these same motivations will continue to prevail in the
unlikely event that a mutual agreement of all members of the community
is successfully negotiated, the maintenance of this agreement will
require the allocation of a substantial portion of the community's
resources to the enforcement of its stipulations. Finally, communal
ownership provides no plausible mechanism through which the total
expected benefits and the total expected costs which can accrue to future
generations from their use of the communally-owned resource will be
appropriately incorporated i.nto the decision-making processes of the
present users of the resource. Consequently, the occurrence of wide-
spread intragenerational and intergenerational externalities appears to
be virtually unavoidable under a regime of unconstrained communal
ownership of resources.
2. 1.2 The Resource Allocation Implications
of Private Ownership**
If a particular resource is privately owned, the individual who
owns the resource has control over the manner in which it is utilized. **;
Thus, before any other individual or group of individuals may affect the
use of the resource, that individual or group of individuals must obtain
*Although it is conceivable that the members of the cooperative
group will enjoy some increase in their utilization of the resource in
future time periods; even if this result occurs, their increased future
utilization of the resource will not exceed the increased future utiliza-
tion of the resource which is obtained by those members of the com-
munity who have declined to join the group. Thus, each group member
can obtain virtually the same future utilization of the resource and an
increased present utilization of the resource if he individually with-
draws from the group.
**The material presented in this section has been abstracted from
Cheung (17), pp. 50-51 and p. 67; Demsetz (37), p. 62; and Demsetz
(38), pp. 355-358, unless it is specifically attributed to another source.
##*Furubotn and Pejovich (43), p. 1140, qualify this statement by
pointing out that although the right of private ownership is an exclusive
right, it is not an unrestricted right. Rather, the right of private own-
ership is exclusive ". . . in the sense that it is limited only by those
restrictions that are explicitly stated in the law as it is interpreted
from time to time. "
2.5
-------
the prior consent of the resource's owner, who is permitted to sell or
transfer his right to control its use at his discretion. Consequently,
in a society which relies exclusively upon the private ownership of
resources, the public sector is required to perform only two functions.
First, the government must determine which individual possesses the
right to control the use of each of the society's scarce resources and
hence, which individual may assert that his rights have been affected
by others in any controversial situation. Second, the government must
utilize the police power of the state to protect the rights which it has
assigned or it must permit the owners of these rights to protect their
rights by themselves.
If all of these conditions are satisfied, it becomes feasible for
each resource owner to attempt to maximize his wealth by selecting
from the set of alternative utilization patterns for his resources that
utilization pattern which he believes will generate a future time stream
of benefits and costs which will maximize the present value of his
rights of private ownership. Since this maximal present value repre-
sents the amount of income which the resource owner expects to be
able to receive in the market in exchange for his rights to use these
resources and since this present value is partially determined by bene-
fits and costs which are expected to accrue to these resources after
the death of the resource owner, it is rational for each resource owner
to attempt to incorporate into his current resource utilization decisions
the supply and demand conditions which he expects to exist in future
generations. Essentially, the resource owner acts as a broker whose
wealth depends upon his effectiveness in reconciling the competing
demands of present and future generations. In this manner, many of
the inter generational externalities which almost certainly will exist
under a regime of communal ownership are internalized automatically
under a regime of private ownership.
Similarly, the private ownership of resources promotes the
internalization of many of the intragenerational externalities which
nomally arise under communal ownership. Since under private own-
ership each resource owner is permitted to exclude other individuals
from the use of his resources, he generally is assured of securing the
rewards which are generated by his allocation of these resources.
This concentration upon the owner of a resource of the benefits and
costs which are produced by his utilization of the resource provides
substantial incentives to use resources more efficiently.
2.6
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Yet, the assignment of private rights to control the use of re-
sources does not necessarily produce the internalization of all exter-
nalities. Since the owner of the private rights to control the use of one
set of resources cannot exclude other individuals from the use of re-
sources which are owned by those other individuals, he has no direct
incentive, in the absence of negotiations, to incorporate into his resource
utilization decisions any consideration of the external effects which his
utilization of his resources imposes upon the private rights of other
individuals. Thus, even under private ownership, many externalities
are expected to arise.
However, an externality which floes arise under the private own-
ership of resources seldom affects all of the resource owners in the
society. Consequently, in general, the internalization of an externality
merely requires that an agreement which appropriately accounts for
this external effect must be entered into and maintained by only a few
resource owners. Hence, the cost of negotiating and policing the inter-
nalization of externalities is considerably lower under private owner-
ship than it would be if resources were communally owned. Thus,
somewhat paradoxically ". . . it can be seen that private rights can be
socially useful precisely becaxise they encourage persons to take
account of social costs. "* In fact, Demsetz has advanced the hypoth-
esis that the development of new private property rights occurs for
precisely this reason. ##
The negotiated internalization of an externality can be accom-
plished through the application of either of two basic techniques: the
establishment by all of the relevant resource owners of a contractual
agreement which precisely stipulates the method of reconciling the
external effects at issue or the outright purchase by some of the rele-
vant resource owners of the private rights of the remaining relevant
resource owners {i. e. , the merger of the private rights of all of the
relevant resource owners). If there are no economies or diseconomies
of scale associated with the ownership of different sized bundles of
rights and if only a single, readily enforceable contractual agreement
#Alchian and Demsetz (1), p. 24.
#*Demsetz asserts that ". . .property rights develop to internalize
externalities when the gains from internalization become larger than
the cost of internalization. Increased internalization, in the main,
results from changes in economic values, changes which stem from the
development of new technology and the opening of new markets, changes
to which old property rights are poorly attuned, " Demsetz (38), p. 350.
2.7
-------
is required to internalize the externality, there is no comparative
advantage to the selection of either internalization'technique. However,
if there are multiple externalities which require the negotiation of
several contractual agreements or if contractual agreements are diffi-
cult to enforce, merger will tend to be the preferred internalization
technique. Conversely, if there are substantial diseconomies of scale
associated with the ownership of bundles of rights, interacting resource
owners will be more likely to adopt contractual agreement as the pre-
ferred internalization technique. Thus, in general, the costs of negoti-
ating and enforcing contractual agreements will be compared with those
costs which depend upon the scale of ownership; bundles of rights will
tend to be accumulated in sizes which minimize the sum of these costs;
and contractual agreements to internalize the remaining external
effects will tend to be arranged by the owners of these optimal sized
bundles of rights.
Nevertheless, despite these extensive opportunities for the in-
ternalization of externalities without governmental intervention when
resources are privately owned, it is virtually inevitable that some
external effects will escape voluntary internalization under a regime
of private ownership. In particular, if a certain external effect im-
pinges upon a large number of resource owners, the control of the
activity which produces this external effect assumes the properties of
a public good. It becomes rational for each resource owner who is
externally affected by this activity to adopt the role of a "free rider"
and to understate his willingness to pay for the optimal control of the
activity. Since it is individually rational for each externally affected
resource owner to behave in this fashion, the unavoidable consequence
is the insufficient control of the externality-producing activity. Thus,
in this situation, it is anticipated that an activity which generates
external diseconomies will be pursued with excessive intensity; while
an activity which creates external economies will be pursued with
insufficient intensity. Consequently, even with private ownership of
resources, it is extremely unlikely that the voluntary actions of resource
owners will produce the internalization of all externalities. The
obvious question which remains is: What action, if any, should be taken
by the government to promote or require the internalization of these
remaining externalities?
2. 1. 3 The Traditional Solution
The traditional solution to the problem of internalizing these
remaining externalities has its origins in the writings of Pigou (85).
2.8
-------
Pigou asserts that an economically efficient allocation of resources is
attained by a society when its national dividend is maximized. More-
over, the national dividend will be maximized when the private mar-
ginal net product is equal to the social marginal net product in all uses.
Thus, inefficiency exists in every activity in which this equality is not
satisfied. To eliminate this inefficiency, Pigou proposes the provision
of incentives which will induce those firms which are generating exter-
nalities to produce those levels of output which will maximize the
national dividend.
More specifically, Pigou recommends the development of a sys-
tem of taxes and subsidies which will modify the cost function of an
externality-producing firm in a manner which will cause the firm's
profit-maximizing output level to correspond to the socially optimal
output level. This recommendation generally has been interpreted as
a proposal that the price of the output of the firm should be modified
to reflect more accurately the social marginal net product through the
imposition of specific (per unit) excise taxes and subsidies upon this
output. Thus, if the firm is generating an external diseconomy, a
specific excise tax should be imposed to induce a reduction in output;
while, if the firm is creating an external economy, a specific excise
subsidy should be provided to motivate an increase in production.
Although this proposal does require that the calculation of the
optimal taxes and subsidies must be performed by the government, it
also permits all production decisions to be made by the individual firms.
Therefore, this traditional solution to the problem of internalizing
externalities maintains a substantially higher degree of decentralization
of dec is ion-making than most alternative public policies, such as the
imposition of a system of standards or the legal prohibition of the
generation o-f external effects.
2. 1.4 The Coase Theorem
The traditional Pigouvian solution to the externality problem has
been generally accepted by economists as the appropriate remedy for
this problem from the time of its initial publication until I960, when it
has been seriously challenged by Coase (19). This challenge begins
with the assertion that the traditional Pigouvian policy of imposing
unilateral taxes and subsidies upon externality-generating firms is
inappropriate because the adequate assessment of all of the social costs
which are attributable to externalities requires a recognition of the
reciprocal nature of any externality situation. Specifically, Coase
declare s:
2.9
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"The traditional approach has tended to obscure the
nature of the choice that has to be made. The question
is commonly thought of as one in which A inflicts harm
on B and what has to be decided is: how should we
restrain A? But this is wrong. We are dealing with a
problem of a reciprocal nature. To avoid the harm to
B would inflict harm on A. The real question that has
to be decided is: should A be allowed to harm B or
should B be allowed to harm A? The problem is to
avoid the more serious harm. "*
Thus, in any externality situation, the external effect is caused by both
the resource owner who generates the effect and the resource owner
who receives it. Consequently, if the optimal allocation of resources
is to be attained, it is desirable that both of these resource owners
should take account of the external effect in making their resource
allocation decisions. In principle, this objective can be attained if an
individual who desires to modify the behavior of another individual who
is generating an externality engages in trade with that other individual
which moves both of them to preferred positions where no additional
mutually agreeable trades are available and, hence, Pareto optimal
equilibrium prevails. The significance of this principle for public
policy has been developed by Buchanan and Stubblebine; who conclude:
"The important implication to be drawn is that full
Pareto equilibrium can never be attained via the im-
position of unilaterally imposed taxes and subsidies
until all marginal externalities are eliminated. If a
tax-subsidy method, rather than "trade" is to be
introduced, it should involve bi-lateral taxes (sub-
sidies). Not only must B's behavior be modified
so as to insure that he will take the costs externally
imposed on A into account, but A's behavior must
be modified so as to insure that he will take the
costs "internally" imposed on B into account. In
such a double tax-subsidy scheme, the necessary
Pareto conditions would be readily satisfied. "**
*Coase (19), pp. 1-2.
*Buchanan and Stubblebine (15), p. 383.
2. 10
-------
Having demonstrated this reciprocal nature of any externality-
situation, Coase uses this result to investigate the implications for
resource allocation of different assignments of property rights in exter-
nality situations. This investigation concludes that, in the absence of
any costs of negotiating and enforcing transactions, if property rights
with respect to liability for the damages caused by an externality are
clearly specified, transferable,* and rigidly enforced, any particular
liability rule will produce an economically efficient allocation of re-
sources. Specifically, when these conditions are satisfied, the stipu-
lated liability rule will provide an incentive to one of the two parties
who are involved in the externality situation to attempt to change the
extent to which external effects are generated by offering inducements
to the other party to modify his behavior. Thus, at the extremes, if
the resource owner who produces an external effect is declared to be
completely liable for the damages caused by this external effect, he
will be motivated to pay an.indemnity to the resource owner who
receives the external effect to secure that resource owner's acquies-
cence to the production of additional output; while, conversely, if the
resource owner who produces an external effect is declared to have no
liability for the damages caused by this external effect, the resource
owner who receives the external effect will be motivated to pay a bribe
to the externality-producing resource owner to induce that resource
owner to reduce his production. In either case, whenever the resource
owner who produces the external effect decides to increase his produc-
tion, he incurs a cost in the form of either an increased indemnity pay-
ment to o_r_ a foregone bribe payment from the resource owner who
receives the effect. Similarly, whenever the resource owner who
receives the external effect decides to decrease the extent to which he
absorbs this effect, he incurs a cost in the form of either a foregone
indemnity payment from or_ an increased bribe payment to the resource
owner who produces the effect. Consequently, whenever either of
these parties makes his resource allocation decisions, he appropriately
incorporates the full social cost of his activities into his decision-
making process. The inevitable result of this procedure is the attain-
ment of an economically efficient allocation of resources.
^Property rights with respect to liability for damages are trans-
ferable if the government enforces liability rules only upon appeal by
one of the parties who are involved in the externality situation. This
enforcement policy introduces the possibility of exchange between these
parties.
2. 11
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Finally, Coase asserts that since the marginal cost associated
with any particular increase in the production of an external effect is
unaffected by the assignment of different liability rules, the same eco-
nomically efficient allocation of resources will be attained regardless
of the liability rule which is adopted, so long as the differences in the
distributio'ns of wealth which are associated with the various liability
rules have no affect upon demand patterns. Thus, in summary, the
Coase Theorem states that if_the income elasticity of demand is zero
in all markets (including the market for the external effect) and if the
costs of negotiating and enforcing transactions are zero, the market
resolution of any externality problem will be both economically effi-
cient and allocatively neutral with respect to the assignment of liability.
Moreover, while Coase establishes the validity of this conclusion
only for those assignments of property rights under which the resolu-
tion of an externality problem requires the unanimous consent of all of
the resource owners who are involved in this problem through the nego-
tiation of a mutually acceptable agreement, Buchanan demonstrates
that, under the assumptions embodied in the derivation of the Coase
Theorem, economic efficiency and allocative neutrality will be pro-
duced under a much broader range of property rights structures, *
Thus, Buchanan proves that the same allocation of resources which is
observed at equilibrium under the property rights structures analyzed
by Coase will also be produced by a collective decision process which
requires the unanimous consent of all members of the community to
any change in the allocation of resources, a collective decision pro-
cess which will perform a reallocation of resource with less than the
unanimous consent of all members of the community (i.e. , with the
consent of a simple majority of the members cf the community), or
an administrative decision process in which the decision-maker maxi-
mizes the potential rent of his right to make the final resource alloca-
tion decision for the entire community. Moreover, Buchanan's proof
of the applicability of the Coase Theorem under these additional struc-
tures of property rights relies merely on the same equilibrating mech-
anism hypothesized by Coase -- the transfer of income from resource
owners who are adversely affected by a decision to at least some of
the individuals who have control over the decision. For example,
under an administrative decision process, the decision-maker can be
*Buchanan (12), pp. 587-590.
2. 12
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induced to maximize the potential rent of his right to make a decision
if he is permitted to collect and retain this rent in the form of personal
side payments. Consequently, it appears that the conclusions of
Coase's analysis will be valid for an extremely broad range of property
rights structures.
However, subsequent researchers5'1 have observed that several
important assumptions which Coase has employed in his analysis are
never stated explicitly in his discussion of this analysis. In particular,
Coase implicitly has assumed that (1) the use of financial capital is a
free good 'and, hence, is readily available to all resource owners for
the payment of indemnities and bribes, (2) information concerning both
current and future opportunities is perfect, and (3) perfect competition
exists in all of the economic sectors which are involved in the externali-
ty situation. Obviously, these additional assumptions impose substan-
tial restrictions upon the number of situations in which the Coase
Theorem can be applied without qualification.
Moreover, and not surprisingly considering the profound impact
which Coase's analysis has had upon the prevailing attitude of econo-
mists toward the appropriate treatment of externality situations, the
preceding qualifications of the range of applicability of the Coase
Theorem constitute relatively minor elements in the controversy which
has developed in response to the publication of Coase's seminal article.
Therefore, the remainder of this section is devoted to the explanation
and reconciliation of the other aspects of this controversy,
2. 1. 5 Equity Considerations
Recognition of the reciprocal nature of externality leads reason-
ably directly to the conclusion that, in any particular externality situa-
tion, the same economically efficient allocation of resources will be
attained regardless of the liability rule which is adopted. However,
Mishan,** Randall,*** and Wellisz**** emphasize that this demonstra-
tion of the allocative neutrality of different liability rxiles does not con-
stitute a demonstration of the ethical neutrality of these different rules.
That is, the realization that, in a particular externality situation, the
*See, for example, Randall (88), p. 44, and Samuels (97), p. 25.
#*Mishan (77), pp. 78-81.
***Randall (88), p. 53.
****Wellisz (115), p. 353.
2. 13
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same composition of output will result if either the resource owner
who produces the externality is required to pay an indemnity to the
resource owner who receives it_or the resource owner who receives
the externality is required to pay a bribe to the resource owner who
produces it does not necessarily imply that these two assignments of
liability are equally socially desirable. Thus, for example, it appears
unlikely that any reasonable society would consider to be socially
acceptable either a liability rule which requires the victims of crime
to bribe criminals to desist from their criminal activity or a liability
rule which judges that little children hit automobiles in pedestrian
crosswalks. Rather than being indifferent among various assignments
of liability because of their demonstrated allocative neutrality, society
may exhibit substantial differences in their preferences for these vari-
ous liability rules for moral and ethical reasons.
Moreover, although the composition of output is independent of
the assignment of liability in externality situations, the distribution of
wealth is directly affected by the particular liability rule which is
adopted. If the resource owner who produces an externality is declared
not to be liable for the damages attributable to this external effect, his
wealth will be greater than it would have been if he had been declared
to be liable for these damages. Conversely, the wealth of the resource
owner who receives the externality will be lower under the former lia-
bility rule than it will be under the latter. Consequently, citing the
case of industrial pollution which affects neighboring resource owners,
Randall* contends that because the owners of the industry which emits
this pollution are likely to be more wealthy than the recipients of the
pollution, a society which prefers a more nearly equal distribution of
wealth would prefer, in this situation, the adoption of a structure of
property rights which assigns liability for the damages caused by this
pollution to the emitters of the pollution. Mishan** extends this argu-
ment by asserting that it may be generally desirable to assign liability
for the damages attributable to a particular externality to the wealthier
resource owner involved in that externality situation, because wealthy
people have greater opportunities to take actions to avoid the adverse
effects of any externality. Thus, the wealthy can move away from a
polluted area; while the poor have less opportunity to change their loca-
tions. The implications of various liability rules for the distribution
of wealth may be extremely important in determining their relative
social desirability.
*Randall (88), p. 41.
i;*Mishan (77), pp. 77-78.
2. 14
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2. 1,6 Allocative Neutrality and
the Distribution of Income
Coase's derivation of the allocative neutrality of alternative lia-
bility rules relies crucially upon the assumption that the amount of
income which a resource owner is willing to pay to avoid incurring a
particular damage is identical to the amount of income which that
resource owner would be willing to accept as compensation for agree-
ing to incur that damage. If, as Coase's analysis assumes, all of the
resource owners who are involved in the externality situation are busi-
ness firms, this assumption is unobjectionable since both of these
amounts of income will be equal to the incremental profit which the
firm earns when this damage is avoided, which is independent of the
firm's total profit level. However, if some of the resource owners
who are involved in the externality situation are merely consumers,
the identity of these two amounts of income will not necessarily exist
for these individuals. As Dolbear* and Mishan** have demonstrated,
if an individual's demand for a good increases as his income increases,
the maximum amount of income which this individual is willing to pay
for any given amount of the good or, alternatively, the minimum amount
of income which he is willing to accept for foregoing this a.mount of the
good will increase as his income increases. This proposition implies
that, ceteris paribus, the maximum amount of income which the individ-
ual will pay for a unit of the good when he does not own this unit is
generally less than the minimum amount of income that he will accept
in exchange for this unit of the good when he does own it. Finally, this
result leads to the crucial implication that different liability rules will
produce different marginal valuations of externalities by consumers
which, in turn, will resxilt in different economically efficient allocations
of resources at equilibrium.
Samuels*** and Weld**** lend further support to this conclusion
by challenging the empirical validity of Coase's assumption that the
income elasticity of demand for all goods is zero. If this assumption
is not satisfied -- as it invariably will not be in actual externality
*Dolbear (39), pp. 95-9? and p. 102.
**Mishan (77), pp. 61-66 and pp. 83-84.
***Samuels (97), pp. 6-12.
#***Weld (114), p. 609.
2. 15
-------
situations -- the different distributions of income which result from dif-
ferent liability rules will generate different patterns of demand for
goods which, in turn, will determine different economically efficient
allocations of resources at equilibrium. Thus, in summary, the exis-
tence of consumers as resource owners in particular externality
situations disaffirms the allocative neutrality of alternative liability
rules in those situations.
Even accepting Coase's implicit assumption that all of the
resource owners who are involved in externality situations are prof it -
maximizing business firms, several researchers have questioned the
allocative neutrality of alternative liability rules in the long run on the
basis of the different distributions of income which evolve under the
various liability rules. * Specifically, these researchers have asserted
that if the initial situation of the economy is one of long run perfectly
competitive equilibrium in which those resource owners who produce
externalities are not liable for the damages attributable to these exter-
nalities and if the society then adopts a new structure of property rights
which declares that these externality-producing resource owners are
liable for these damages, this modification of the prevailing liability
rule will induce a change in the distribution of income which will result
in the earning of negative profits by the resource owners who produce
externalities and the earning of positive profits by the resource owners
who receive externalities. In the long run, this profit disequilibrium
will induce the allocation of additional resources to the activities con-
trolled by the resource owners who receive externalities and the exit
of resources from the activities managed by the resource owners who
produce externalities. Thus, in the long run, the allocation of resour-
ces will be affected by the assignment of different liability rules.
Nutter** disputes this conclusion by demonstrating that this re-
allocation of resources will not occur in response to a modification
of liability rules if each resource owner in an externality situation owns
some non-transferable resources on which he earns sufficient Ricardian
rent when he is not liable for the damages attributable to the externality
that he will be able to pay for these damages without causing this rent
*See, for example, Bramhall and Mills (9); Regan (90), p. 432;
and Wellisz (115), p. 350.
**Nutter (82). This position is also acknowledged by Wellisz (37),
p. 351.
2. 16
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to become negative when he is liable for damages. Moreover, Nutter
contends that this situation generally will exist because "... a combina-
tion of activities generating a nuisance will not be introduced into a
perfectly competitive economy unless that combination yields at least
as large a net value of output as any other uses of the same resources
would yield. "*
Calabresi presents a more inclusive defense of the existence of
allocativc neutrality in the long run when he asserts that ". ..the same
type of transactions which cured the short run mis allocation would also
occur to cure the long-run ones. "#* In particular, he contends that,
under the assumptions of Coase's analysis (including the assumption
that changes in the distribution of wealth have no effect on demand
patterns), the resource owners who have gained wealth as a result of
the modification of liability rules will be dissatisfied with the new allo-
cation of resources and, hence, will bribe the resource owners who
have lost wealth because of this restructuring of property rights to
increase their production. This briber y proce s s will continue until
the initial allocation of resources is reestablished.
While this controversy concerning the allocative neutrality of
alternative liability rules in the long-run has produced several intriguing
theoretical arguments, it is important to remember that all of these
arguments are based on the unrealistic assumption that all resource
owners who are involved in any externality situation are profit-maxi-
mizing business firms. Consequently, the conclusions advocated in this
controversy are of limited practical usefulness.
2. 1. 7 Allocative Neutrality and the
Symmetry of Liability Rules
The demonstration of the allocative neutrality of alternative lia-
bility rules directly implies that both the policy of discouraging increases
in the production of an externality through the imposition upon the pro-
ducer of this externality of a charge equal to the value of the damages
attributable to the externality and the policy of encouraging reductions
in the production of the externality through the offering by the recipients
*Nutter (82), p. 507.
--Calabresi (16), p. 67.
2. 17
-------
of the externality to its producer of a bribe equal to the value of the
damages avoided are symmetric methods of internalizing the externality.
However, considerable doubt has been cast upon the validity of this
implication in the economic literature.
The most frequently asserted justification* for the contention that
bribes and charges are asymmetric methods of internalizing externali-
ties is based upon the recognition that the determination of the appro-
priate magnitude of either a bribe or a charge requires the comparison
of the actual level at which an externality is produced to a specified
base level of production of that externality. Although the development
of an economically efficient charge mechanism is not difficult since no
production of the externality constitutes an effective specified base
level for a charge mechanism, the development of an economically
efficient bribe mechanism is likely to be substantially more difficult.
The specified base level of externality production for a bribe mechanism
must be at least as great as the level which the producer of the exter-
nality would choose to produce in the absence of any inter nalization of
the externality. To guarantee that this condition will be satisfied, the
recipients of the externality (or, altc raatively, the administrative
authority which is responsible for the implementation of the bribe
mechanism) must have complete knowledge of the cost constraints and
revenue opportunities which confront the producer of the externality.
While it is conceivable that an acceptable specified base level for a
bribe mechanism might be determined initially, it is unlikely that this
base level will be maintained at an effective level as the market condi-
tions facing the externality producer change over time. If, at any time,
the cost and revenue conditions confronting the producer of the exter-
nality cause his prof it-maximizing production level to exceed the speci-
fied base level, the bribe mechanism will cease to be effective in induc-
ing the internalization of the externality. Once again, to assure that
the specified base level will be adjusted appropriately to avoid this
outcome, it is required that the recipients of the externality must have
complete knowledge of the profit opportunities of the externality pro-
ducer. Since the likelihood that this condition will be satisfied is
extremely low, the symmetry of bribes and charges is very unlikely to
prevail.
*This justification appears in Dolbear (39), pp. 100-101 and
p. 103; Kamien, Schwartz, and Dolbear (53); Mumey (79); and Tybout
(110), pp. 261-262.
2. 18
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Mumey* extends this argument by asserting that, with a bribe
mechanism, it is conceivable that the producer of an externality will
attempt to extract excessive bribes from the recipients of the externality
by threatening to produce the externality at a level which exceeds the
level at which he would choose to produce it in the absence of any inter -
nalization. If this strategy is generally adopted by the producers of
externalities, the essentially coercive redistribution of income which
will evolve from its application will have a noticeable impact upon the
composition of the society's output unless the income elasticity of
demand for all goods is zero.
A different and possibly more'damaging criticism of the asser-
tion that bribes and charges are symmetric methods of internalizing
externalities is developed by Marchand and Russell (66), who demon-
strate that these two techniques will produce the same economically
efficient allocation of resources only if the cost functions of the recipi-
ents of the externality are separable (i. e. , if the magnitude of the
external cost which is imposed on each recipient by the externality is
independent of the level of output which is produced by the recipient). **
However, if the cost functions of the recipients are non-separable (i.e. ,
if the magnitude of the external cost attributable to the externality is
affected by the output decisions of the recipients), neither a bribe nor
a charge will generate the optimal allocation of resources which evolves
when both the producers and the recipients of the externality cooperate
in the maximization of their joint profits. Instead, the adoption of a
bribe mechanism will result in the production of an inefficiently high
level of output by the producers of the externality and an inefficiently
low level of production by the recipients of the externality. Conversely,
the introduction of a charge mechanism will induce the production of
an inefficiently low level of output by the producers of the externality
and an inefficiently high level of production by the recipients of the
externality.
Gifford and Stone (45) assert that all of the preceding refutations
of the symmetry of bribes and charges can be circumvented by develop-
ing bribe or charge mechanisms which compare the level of profits
which the recipients of the externality will earn if the production of the
* Mumey (79), pp. 722-723.
^Formally, a cost function C (qj_, q£) is separable if it can be
expressed in the form: C (q^ q ) = C1 (q^) + C
2.19
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externality is modified with a specified base level of the recipients'
profits. Not surprisingly, the level of profits which accrue to the recipi-
ents when the externality is not produced constitutes an acceptable
specified base level of profits for a charge mechanism; while the level
of profits which accrue to the recipients when no internalization of the
externality is undertaken constitutes an acceptable specified base level
of profits for a bribe mechanism. However, it is important to recog-
nize that the determination of these specified base profit levels requires
not only complete knowledge of the cost and revenue conditions which
confront the producers of the externality, but also complete knowledge
of the profit opportunities which are available to the recipients of the
externality. Since these information requirements are substantially
more stringent than the information requirements of the standard bribe
and charge, mechanisms, it is even less likely that these new require-
ments will be satisfied in either a static or a dynamic context. Conse-
quently, it appears reasonable to assert that, in general, asymmetry
will exist between bribes and charges as mechanisms for the internali-
zation of externalities.
2. 1. 8 The Need for Bi-Lateral Payments
As has been asserted previously, the recognition of the recipro-
cal nature of externality implies that the imposition of unilateral taxes
or subsidies constitutes an ineffective technique for internalizing exter-
nalities. Specifically, it has been contended that if a community adopts
a charge mechanism under which the recipients of an externality are
not paid compensation for the externality which they receive at equi-
librium, they will fail to recognize the full social cost associated with
the imposition of more stringent restrictions upon the production of the
externality and, hence, will be motivated to seek the adoption of these
additional, inefficient restrictions. Consequently, to preclude this
possibility, the imposition of bi-lateral taxes and subsidies has been
recommended as the universally appropriate technique for the internali-
zation of externalities.*
However, the implementation of this recommendation clearly is
substantially more difficult than the implementation of the traditional
Pigouvian solution. As explained by Regan:
*This recommendation is proposed explicitly in Buchanan (13),
p. 447; Buchanan and Stubblebine (15), p. 383; and Furubotn and
Pejovich (43), p. 1142.
2.20
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"The reciprocal nature of most externalities means that
Pigou considerably underestimated the difficulty of find-
ing regulatory (tax-subsidy) schemes which would guaran-
tee internalization. ... In general, to set up an appropriate
tax-sub sidy scheme might require as much information
on the part of the regulating agency as would be required
for centralized decision-making. The market-mechanism-
plus-regulation, then, is no certain high road to efficiency. "*
In addition, Baumol** contends that in those situations in which
there arc a large number of recipients of an externality, the introduc-
tion of a charge mechanism under which the recipients are paid com-
pensation for the externality which they receive is unnecessary. In
these situations, the external effect constitutes a public externality and
the control of the external effect constitutes a public good. Thus,
Baumol asserts:
"As with all public goods, an increase in one user's con-
sumption does not reduce the available supply to others.
Hence, the appropriate price (compensation) to a user of
a public good (victim of a public externality) is zero
except, of course, for lump sum payments. Thus, per-
haps, rather than saying there is no price that will yield
an optimal quantity of a public good (externality), it may
be more illuminating to say that a double price is required:
a nonzero price (tax) to the supplier of the good, and a
zero price to the consumer. Of course, no ordinary price
can do this job, but a Pigouvian tax, without compensation
to those affected by an externality, can indeed do the
trick. "#*#
Finally, Marchand and Russell**** demonstrate that, if the cost
functions of the recipients of an externality are non-separable, neither
a bi-lateral bribe mechanism nor a bi-lateral charge mechanism will
produce the optimal allocation of resources. Yet, in this same situa-
tion, an appropriate unilateral charge mechanism (a traditional
*Regan (90), pp. 436-437.
**Baumol (4), pp. 309-312.
***Baumol (4), p. 312.
*#*# Marc hand and Russell (66), p. 615.
2.21
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Pigouvian tax) can induce am inte rnalization of the externality which
will produce this optimal allocation of resources. Moreover this
unilateral charge mechanism can also be effective when the cost func-
tions of the recipients of the externality are separable.
Consequently, it can be concluded that the imposition of In-lateral
taxes and subsidies does not constitute a universally appropriate tech-
nique for the internalization of externalities. Rather, in each exter-
nality situation, the appropriate internalization technqiue must be
determined on the basis of such considerations as the cost conditions
confronting the recipients of the externality, the number of recipients
involved, and the administrative requirements associated with the im-
plementation of the technique.
2. 1. 9 Transaction Costs and
Allocative Neutrality
To derive the conclusion that the allocation of resources at equi-
librium is unaffected by modifications of the prevailing liability rule,
it is necessary to assume that there are no costs associated with per-
forming transactions. However, in any realistic situation, it is ex-
tremely unlikely that this assumption will be satisfied. Therefore,
since positive transaction costs inhibit exchange, in any realistic
situation, the allocation of resources at equilibrium will be influenced
by the particular liability rule which has been adopted. More specifi-
cally, in a particular externality situation, the production of the exter-
nality will be greater if the resource owner who produces the external
effect is declared to have no liability for the damages attributable to
this external effect than if this individual is declared to be completely
liable for these damages. A change in the prevailing liability rule
introduces new opportunities for mutually beneficial exchange and,
consequently, produces alterations in the allocation of resources at
equilibrium. *
Moreover, in any externality situation, the disparity between the
allocations of resources which prevail at equilibrium under different
liability rules will increase as transaction costs increase. In fact,
it is conceivable that in some situations transaction costs may be so
high that movements away from the initial allocation of resources
which is specified by the liability rule may be impossible.
*Samuels (97), pp. 19-20.
2.ZZ
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Finally, as the externality situation becomes more complex and
as the number of resource owners who are involved in this situation
increases, deviations from allocative neutrality are likely to expand.
Thus, for those large-scale externality situations which are generally
acknowledged to be social problems, it is virtually certain that differ-
ent liability rules will generate different allocations of resources at
equilibrium. *
2. 1. 10 Differential Transaction Costs
and Alternative Liability Rules
Demsetz** asserts that the absence of an observable market for
an externality may constitute an economically efficient outcome since,
when this situation exists, the transaction costs which must be incurred
to establish a market for this externality must exceed the benefits
which will be obtained by society if this market is established. While
this assertion will be unambiguously true if the same level of trans-
action costs must be incurred for all of the alternative liability rules
which might be adopted in this externality situation, its validity is un-
certain if different levels of transaction costs are associated with
different liability rules.
Consequently, as McKean, ##* Mishan, **** Randall, ***** and
Samuels****** have stated and Crocker (23) has demonstrated empiri-
cally, it is fallacious to conclude from an observation that no agree-
ment has been negotiated for the internalization of a particular exter-
nality, that no agreement can be negotiated for the internalization of
this externality. The adoption of a different liability rule which requires
the incurring of a lower level of transaction costs than has been re-
quired under the initial liability rule may permit the negotiation of an
agreement for the internalization of the externality which has been
unattainable under the initial liability rule. Although each alternative
liability rule will generate an economically efficient allocation of
#Randall (88), pp. 43-44.
**Demsetz (35), pp. 13-14.
***McKean (70), pp. 625-626.
****Mishan (77), pp. 70-75.
*****Randall (88), pp. 45-46.
******Samuels (97), pp. 21-23.
2.23
-------
resources relative to that liability rule, not all of these efficient alloca-
tions of resources will constitute a maximization of net social product.
Thus, if the maximization of net social product is desired, society
must make a choice among different economically efficient allocations
of resources. In addition, since it is possible that some type of non-
market mechanism may involve a lower level of transaction costs than
is attainable through a negotiated internalization of the externality under
any liability rule, it is conceivable that the maximization of net social
product may require the acceptance of some form of governmental
intervention. *
2. 1. 11 Criteria for Choosing the Optimal
Internalization Mechanism
The discussion in the preceding sections strongly indicates that,
the Coase Theorem notwithstanding, it will be necessary for society
to choose among alternative structures of property rights, alternative
liability rules, and alternative forms of governmental intervention if
the net social product is to be maximized. Moreover, if society desires
a reasonable level of assurance that the particular internalization
mechanism which it chooses to adopt has a satisfactorily high proba-
bility of achieving the maximization of net social product, the choice
of this internalization mechanism must be based upon rational selec-
tion criteria. Consequently, numerous economic researchers** have
proposed that, in any particular externality situation, a society should
adopt that internalization mechanism which maximizes the difference
between the benefits which will be obtained by the society if the mecha-
nism is adopted and the costs which will be incurred by society if this
alternative is chosen.*** Specifically, Demsetz asserts:
*Demsetz (34), p. 34, Randall (88), pp. 45-46.
**See, for example, Calabresi (16), p. 69; Coase (19)> p. 44;
Demsetz (34), pp. 33-34; Demsetz (35), p. 19; and Furubotn and
Pehovich (43), p. 1145.
*Samuels (97), pp. 23-25, correctly cautions that since the dis-
tribution of wealth is influenced by the structure of property rights and,
in turn, the equilibrium set of market prices is influenced by the distri-
bution of wealth, the utilization of any particular set of market prices
to calculate these benefits and costs presupposes the legitimacy of a
particular structure of property rights and potentially biases the results
of the selection process in favor of that structure of rights. Obviously,
a prudent decision-maker should take this potential bias into considera-
tion before he decides to adopt any specific internalization mechanism.
2.24
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"If a net increase in the total value of property follows a
change in the mix of rights, the change should be allowed
if we seek to maximize wealth. Not to allow the change
would be to refuse to generate a surplus of value sufficient
to compensate those harmed by the change. *
However, in calculating the benefits and costs which will accrue
to society if a particular internalization mechanism is adopted, these
benefits and costs must be defined broadly if a reasonable probability
of the selection of a socially desirable alternative is to be assured.
Thus, it is important to incorporate into the selection process all of
the following benefit and cost considerations.
2. 1. 11. 1 The Costs of Defining, Policing,
Exchanging, and Enforcing
Property Rights**
If the internalization of a particular externality is to be performed
through the assignment of property rights to that externality (i.e. , the
specification of a liability rule with respect to that externality) and the
subsequent exchange of these property rights, several costs must be
incurred. First, before any exchange can occur, costs must be incurred
in defining Lhe property rights which belong to each individual who
is involved in the externality situation and in policing the exclusivity
of these property rights. Second, if any mutxial agreement concerning
the internalization of the externality is to be attained, costs must be
incurred in negotiating contracts for the exchange or transfer of pro-
perty rights and, subsequently, in enforcing the contracts which have
been negotiated. Obviously, all of these cost elements must be incor-
porated into the decision-making process which will select the appro-
priate internalization mechaniszn for this externality situation.
2. 1. 11.2 Information Requirements
The derivation of the economic efficiency of negotiated market
solutions to externality problems depends critically upon the assump-
tion that, in his decision-making processes, each resource owner who
*Demsetz (35), p. 19.
#*The material presented in this subsection has been abstracted
from Cheung (17), pp. 67-68; Crocker (22), pp. 564-570; Crocker (23),
pp. 461-464; and Demsetz (35), pp. 14-15.
2.25
-------
is involved in an externality situation will consider as an opportunity
cost the payments of bribes or indemnities which he will forego when
he makes any specific resource utilization decision. However, Samuels
contends that this assumption is unrealistic. Instead, he asserts,
"Actual market costs depend in part on whose interests are inade a
cost to others, through rights. "* Thus, a resource owner who pro-
duces an externality will be more likely to consider as a cost the dam-
ages which are attributable to this externality if the prevailing struc-
ture of property rights requires him to obtain from the resource
owners who receive this externality consent to his production of the
externality prior to this production than if the prevailing structure of
property rights does not require this obtaining of prior consent. This
conclusion is especially likely to be relevant if the resource owners
who receive the externality never actually offer a bribe to the exter-
nality-producing resource owner when the latter structure of property
rights prevails. Moreover, it is unlikely that a bribe actually will be
offered by the resource owners who receive the externality if their
number is sufficiently large that abatement of the externality assumes
the nature of a public good. Consequently, inadequate information can
be expected to cause economic inefficiency in the internalix.ation of
externalities through the negotiated exchange of property rights in
numerous externality situations.
Conversely, Davis and Whinston** demonstrate that the imple-
mentation of a taxation or subsidy mechanism for the intcrnalization
of an externality may impose upon the administrator of this mechanism
information requirements which are so demanding as to preclude the
adoption of this internalization mechanism. Specifically, the volume
of information which must be collected and analyzed to implement a
taxation or subsidy mechanism is likely to be sufficient to permit its
administrator to determine directly the optimal resource utilization
decision for each of the resource owners who is involved in the exter-
nality situation. When this outcome occurs, the direct specification of
the optimal allocation of resources will be at least as tractable as the
calculation of the appropriate tax and subsidy schedules. Moreover,
this conclusion can be asserted with greater conviction if the cost
*Samuels (97), p. 18.
;*Davis and Whinston (31) and Davis and Whinston (32).
2.Z6
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functions of the resource owners who are involved in the externality
situation are non-separable than if these cost functions are separable.
Although Davis and Whinston do propose an iterative procedure
for the determination of appropriate taxes and subsidies which circum-
vents most of these information collection and analysis requirements,*
the implementation and operation of this procedure is not costless.
Consequently, they conclude that in many externality situations the opti-
mal public policy might be to permit the merger of the resource owners
who are involved in the situation until the "natural unit" for decision-
making has been achieved. **
Finally, Dolbear*** establishes that the implementation of a tax-
ation or subsidy mechanism for the internalization of externalities in
situations in which some or all of the resource owners who are involved
in the situations are merely consumers generally will require the ob-
taining of detailed information about the nature of the preference func-
tion of each of these resource owners. Obviously, the collection of this
information will be extremely expensive. In fact, it may be impracti-
cable at any cost.
Consequently, it is impossible to assert that any specific inter-
nalization mechanism unambiguously requires the least costly amount
of information in all externality situations. Rather, it must be con-
cluded that the selection process which determines the internalization
mechanism which will be adopted in any particular externality situation
should carefully consider the information requirements associated with
each of the alternative mechanisms which is available for adoption.
2. 1. 11. 3 Uncertainty
The derivation of the Coase Theorem assumes that all of the
consequences arising from the production of a particular externality
are known with certainty by either the resource owners who produce
the externality or the resource owners who receive the externality and,
hence, that all of the consequences will be incorporated appropriately
into the negotiated agreement for the internalization of the externality.
Yet, in practice, this assumption seldom will be satisfied in any
realistic situation.
•'Davis and Whinston (32), pp. 312-316.
-'Davis and Whinston (31), p. 261.
;Dolbear (39), pp. 97-99 and pp. 101-103.
2.27
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•Recognizing that this condition exists, Demsetz arrives at the
following conclusion:
"The greater the uncertainty of effect, the less inclined
we should be to require that prior compensation be paid
to those harmed or prior fees be charged of those bene-
fited. The cost of sorting out and measuring legitimate
claims in cases of great uncertainty would be so high as
to undermine efficient resource use. . . . Innovation and
change would be uneconomically hampered by the imposi-
tion of such costs in the presence of uncertainty. "*
Conversely, Mishan** expresses a strong preference for the
adoption of a liability rule which incorporates a strong bias against,
or even an effective prohibition of, the production of externalities when
substantial uncertainty exists. In fact, Mishan contends, "Insofar as
the group concerned underestimates the effects on itself of a number
of spillovers, the negotiated solution, even where practicable, is not
satisfactory. "***
To understand the basis for these diametrically opposed positions,
it must be realized that Demsetz considers the uncertain effects to be
relatively insignificant and reversible, while Mishan regards these
effects as major and irreversible. A reconciliation of these polar
attitudes is provided by Calabresi, **** who acknowledges that either
of these conditions might prevail in different externality situations and,
hence, that in any particular uncertain situation, society should adopt
that liability rule for which the market is most likely to correct an
error in the initial assignment of property rights. A generalization of
this basic principle is provided by Cheung,***** who suggests that, in
any uncertain situation, the socially most desirable liability rule can
be determined by comparing the risk associated with the adoption, of
each alternative liability rule with all of the other costs and benefits
*Demsetz (37), p. 64. Demsetz later qualifies this conclusion
by stating, "The requirement of prior compensation if those affected
can be ascertained easily and the denial of prior compensation when
those affected can be identified only with great difficulty does not deny
the efficiency of requiring compensation in many of the uncertain cases
a.f_ter_the_f_act. "
**Mishan (77), pp. 81-82.
***Mishan (77), p. 81.
****Calabresi (16), pp. 69-70 and pp. 72-73.
*****Cheung (18), pp. 24-29.
2.28
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attributable to the adoption of that rule. Obviously, the application of
this general principle is not limited solely to choices among alterna-
tive liability rules and, hence, can be extended to choices among all
possible forms of internalization mechanisms.
This principle implies that, since all externality situations do
not involve the same degree of uncertainty, different internalization
mechanisms will be socially most desirable in different externality
situations. Moreover, since different communities may exhibit differ-
ent degrees of risk aversion, this principle implies that different com-
munities rationally may adopt different internalization mechanisms for
essentially identical externality situations.
2. 1. 11.4 Stability of Equilibrium
The derivation of the economic efficiency of the allocation of
resources which arises under each alternative liability rule which is
available for adoption requires only the application of comparative
static techniques. However, the process through which each of these
economically efficient allocations of resources is negotiated in the
market is dynamic. Thus, Weld (114) contends that, in selecting among
alternative liability rules, society should consider both the pattern of
convergence to equilibrium and the speed of convergence to equilibrium
which will prevail under each of these liability rules. In particular,
he asserts that a minimal condition which must be satisfied by any
acceptable liability rule is that, in response to any disturbance of an
equilibrium which has been established under that liability rule, a new
economically efficient allocation of resources will be negotiated. More-
over, he declares that the consideration of stability in the evaluation
of alternative liability rules should not be restricted to a consideration
of narrowly defined economic concepts of stability but, in addition,
should include a consideration of the stability of legal, neighborhood,
and societal interests. Obviously, these stability requirements are
applicable not only to the evaluation of alternative liability rules, but
can be applied with equal validity to the evaluation of other internaliza-
tion mechanisms.
2. 1. 12 Implications for the Selection of
Specific Internalization Mechanisms
If the selection criteria which have been described in the pre-
ceding section are acknowledged to be reasonable, it becomes justifi-
able to derive from these criteria general recommendations for the
selection of socially desirable internalization mechanisms. Thus,
2.29
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Demsetz proposes that, in choosing the particular liability rule which
is most likely to constitute the most effective mechanism for the inter-
nalization of externalities through the negotiation of mutual agreements
in a specific externality situation, ". .. it will be efficient to assign new
property rights in a way that is expected to minimize the cost of trans-
acting that will be required subsequently. "* For example, in an exter-
nality situation in which the number of resource ov/ners who receive
the externality is sufficiently large that the abatement of the externality
assumes for them the nature of a public good, while the number of
resource owners who produce the externality is sufficiently small that
no significant public goods problem arises for them, liability for the
damages attributable to the externality should be assigned to the
resource owners who produce this external effect since this assign-
ment of property rights will simultaneously minimize transaction
costs and maximize the probability that the externality will be inter-
nalized through negotiated agreements.
The empirical validity of this proposal has been demonstrated by
Crocker (23), who has isolated a specific situation in which the reassign-
ment of liability for the damages attributable to air pollution from the
recipients of this pollution to its emitters has substantially increased
the extent to which agreements for the internalization of this externality
have been negotiated. At a more conceptual level, Liebhafsky (6l> has
utilized this proposition to justify his assertion that, in any situation
in which the assignment of liability for damages to the resource owners
who receive an externality motivates these resource owners to bribe
the resource owners who produce this externality to refrain completely
from this production, the granting of an injunction which prohibits the
production of the externality will be more economically efficient than
the adoption of any liability rule. Finally, on the basis of this proposal,
McKean (70) has developed a framework for the evaluation of the rela-
tive merits of a wide range of alternative assignments of liability for
the damages attributable to product failure.
While all of these studies have applied the proposal that the
socially most desirable alternative in an externality situation is that
alternative which minimizes transactions costs only to choices among
*Demsetz (37), p. 66. A similar proposal is advanced by
Crocker (23), p. 464.
2. 30
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alternative liability rules, Cheung* contends that this proposal is equally
applicable to choices between internalization mechanisms which rely
solely upon negotiated agreements and internalization mechanisms
which require governmental intervention. Moreover, he asserts that
the application of this proposition to choices of this type generally will
result in the adoption of an internalization mechanism which relies
solely upon the negotiation of mutually acceptable agreements. Cheung
expects this outcome to prevail for two reasons. First, the voluntary
exchange in organized markets of rights to produce, or to prevent the
production of, extern'alities automatically generates information about
the benefits and costs arising from the use of these rights. This infor-
mation can be obtained only at considerable cost when the government
regulates the use of these rights and, hence, completely voluntary
exchange is precluded. Second, since the internalization of many
externalities requires the simultaneous satisfaction of several equi-
librium conditions, a single regulation, such as a specific excise tax
or a specific excise subsidy, maybe incapable of promoting internali-
zation in many instances. Yet, in these same situations, a voluntarily
negotiated agreement which contains multiple stipulations can produce
an economically efficient allocation of resources. In general, an agree-
ment of this type can be replaced only be a set of governmental regula-
tions .
Although Cheung's reasoning undoubtedly is applicable in many
externality situations in which only a small number of resource owners
cither produce or receive the externality, it clearly is inappropriate
in those situations in which either the number of resource owners who
produce the externality or the number of resource owners who receive
the externality is sufficently large that the internalization of the exter -
nality assumes the nature of a public good. In this situation, the nego-
tiation and enforcement of an internally consistent set of voluntarily
negotiated agreements between e_ach resource owner who produces an
externality and each resource owner who receives this externality will
be extremely expensive, if not impossible.
Recognizing this problem, Randall** asserts that, in any situa-
tion of this type, internalization of the externality requires either the
*Cheung (17), pp. 68-70.
**Randall (88), pp. 46-52.
2. 31
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establishment of a collective organization which includes as members
all resource owners for which control of the externality constitutes a
public good or the creation of a public administrative, agency to repre-
sent the interests of these resource owners. Moreover, if a collective
organization is established, this organization should not require that
all of its members must consent to any action which it undertakes,
since the transaction costs which are associated with the implementa-
tion of a unanimity requirement of this type will be essentially identi-
cal to the transaction costs which arise when each resource owner
independently negotiate s his own agreements for the internalization of
the externality. Consequently, a collective organization should be
permitted to undertake actions with less than the unanimous agreement
of its members, despite the realization that any deviation from unanim-
ity admits the possibility that economically inefficent actions might be
undertaken. *
Similarly, although Buchanan** contends that, when transaction
costs are nonexistent, the attainment of an economically efficient allo-
cation of resources by a public administrative agency requires that the
decision-maker who has the right to make the final resource allocation
decision for the entire community must be able to collect and maintain
the potential rent of this right in the form of personal side payments,
he concedes that the prohibition of the collection of personal side pay-
ments by the dec is ion-makers of public administr ative agencies may
be consistent with the attainment of economic efficiency when the inter-
nalization of the externality assumes some characteristics of a public
good. When public goods problems arise, the resource owners who
produce the externality and the resource owners who receive the exter-
nality will not be equally motivated to offer side payments to the rele-
vant decision-maker and, hence, the permission of side payments may
promote economic inefficiency.
Acknowledging the relative strengths and weaknesses of collective
organizations and public administrative agencie's, Randall concludes
that, in general, as the number of resource owners who are involved
in an externality situation increases, collective organizations become
relatively less effective and public adminstrative agencies become
-Buchanan (13), pp. 446-448 strongly supports Randall on this
issue.
**Buchanan (12), pp. 589-594.
2. 32
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relatively more effective in performing the internalization of the
externality. Moreover, he asserts that, if either a collective organiza-
tion has been established or a public administrative agency has been
created, it maybe desirable to allow dissatisfied members of the group
which is represented by the collective organization or public administra-
tive agency "...to have individual access to the courts... to complain
that the collective or agency has not acted appropriately. "*
Finally, Baumol** demonstrates that if a particular externality
is sufficiently strong, any specific internalization mechanism rmiv
generate any one of several different economically efficient allocations
of resources. However, only one of these allocations of resources
will constitute the socially most desirable allocation relative to that
internalization mechanism. Consequently, it is impossible to guarantee
that the internalization mechanism will produce its socially most desir-
able allocation of resources. In this situation, Baumol recommends
that society should specify a set of minimum standards of acceptability
and, subsequently, seek to develop a taxation and subsidy mechanism
which is capable of attaining these specified standards. A similar
proposal is advanced by Dales (25), who asserts that the stringent infor-
mation requirements of those mechanisms which provide for the com-
plete internalization of externalities renders these mechanisms im-
possible to implement. Consequently, he. concludes that the best
available strategy for the control of an externality consists of the speci-
fication of a set of minimum standards of acceptability in the production
of this externality, the creation of that quantity of rights to produce
this externality which is consistent with these standards, and the
establishment of a. market in which these rights can be exchanged.
Obviously, the prices which are established for these rights in this
market are functionally equivalent to Baumol's taxes and subsidies as
incentives for the attaimment of the specified standards.
*Randall (88), p. 52. Once again, Randall's position is consistent
with that of Buchanan, who states, "In this setting, the only role of the
judiciary should have been one of determining whether or not the deci-
sion taken by the legislature was made constitutionally." Buchanan (13),
P. 449.
**Baumol (4), pp. 315-320.
2.33
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2. 1. 13 Synthesis
The numberous and varied proposals which have been advanced
for the adoption of particular internalization mechanisms in particular
externality situations lead inevitably to the conclusion that there exists
no single mechanism for the internalization of externalities which uni-
formly constitutes the socially most desirable internalization mecha-
nism in all externality situations. Rather, the appropriate internaliza-
tion mechanism for any particular externality situation can be deter-
mined only after a careful evaluation of the relative strengths and
weaknesses of each available alternative internalization mechanism
in that situation has been completed. For, as Coase asserts;
"All solutions have costs and there is no reason to suppose
that government regulation is called for simply because
the problem is not well handled by the market or the firm.
Satisfactory views on policy can only come from a patient
study of how, in practice, the market, firms and govern-
ments haiadle the problem of harmful effects. "*
Thus, since the costs and benefits which are attributable to the
adoption of any particular internalization mechanism differ both among
resource owners and among externality situations, it is reasonable
for a variety of different internalization mechanisms to exist simul-
taneously.
2. 2 Legal Relationships Between Property
Rights and Externalities
The Restatement of Property defines "right" as "a legally enforce^
able claim of one person agains.t another, that the other shall do a
given act or shall not do a given act. "** Therefore, "property rights"
may be thought of in terms of the legal relationship (the rights and the
duties) between a property owner and another person. One has a pro-
perty right when one is able to legally compel another to do or not do
a given act.
*Coase (19), p. 17.
**Re statement of Property. Section 1.
2.34
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When a person's activity .cause s dainage to a landowner, the
landowner may have a property right which can be invoked to force the
person causing the damage to cease the activity and to compensate the
landowner for any damage incurred. The law of nuisance is applied to
determine whether the landowner does have a property right which has
been violated. A private nuisance has been defined as "an interference
with the use and enjoyment of land.* Courts have recognized their
role in the area of nuisance as primarily resolving the conflict between
two opposing principles of property law;
"The land of nuisance plys between two antithetical ex-
tremes: The principle that every person is entitled to
use his property for any purpose that he sees fit, and
the opposing principle that everyone is bound to use his
property in such a manner as not to injure the property
or rights of his neighbor. For generations, courts, in
their tasks of judging, have ruled on these extremes
according to the wisdom of the day, and many have
recognized that the contemporary view of public policy
shifts from generation to generation. "**
The purpose of Section 2.2. 1 will be to examine the law of nuisance and
attempt to observe the "judicial wisdom of the day. "
Property rights may also be violated when the government
attempts to regulate a landowner's use of his property. As in the area
of nuisance law, two conflicting legal principles must be reconciled
by the courts to determine whether a property right has been violated,
The first principle is that the government does noi violate any property
rights when, through its inherent police power, it regulates the use of
land to promote the health, safety, morals, and general welfare of the
people. The second principle is that a property right exists which
protects a landowner from the government's power of eminent domain
unless his land is taken for a public purpose and only after just com-
pensation is paid. **# The requirement of a public purpose has been
*Prosser (87), Chapter 15, p. 591.
**Antpnik v Chamberlain, 81 Ohio App. 465, 475, 78 N. E. 2d
752, 759 (Ct. App. Summit County 1947).
**#For a discussion of just compensation, see Almota Farmers
Elevator & Warehouse Co. v. United States, 409 U.S. 470, 473-474
(1973).
2.35
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expanded to include most governmental activities.* Thus, the conflict
narrows to a discussion of whether the government action is regulatory,
in which case no property right is involved, or whether it amounts to a
taking, in which case a landowner has a property right to receive com-
pensation. The conflict between taking and regulation will be examined
in Section 2.2.2.
2.2.1 Externalities, Environmental
Quality and Nuisance Law
Before examining nuisance law, a brief discussion of the court
system in the United States is necessary. Actually, there are two
court systems in the United States: federal and state. The federal
courts have not decided many nuisance law cases. The very nature of
the controversy -- a local, land related matter -- tends to eliminate
the diversity of citizenship usually required for federal jurisidctioii in
this area.
The state courts have decided most of the cases in the area of
nuisance law. It should be emphasized that decisions in one state are
not binding upon another state and, hence, have only persuasive value
in any other state. This results in a lack of consistency in decisions
throughout the United States. On the other hand, while differences
exist among the states, certain nuisance law concepts seem applicable
to nearly all jurisdictions .
Furthermore, even in a given state, a court may choose not to
follow its earlier decisions under certain circumstances. Changes in
economic or social conditions may compel a court to shift, if not totally
reverse, its previously announced position. However, the doctrine of
s ta re d e c i si s - - an adherence to previous precedents -- tends to pre-
serve consistency and stability in court decisions.
Therefore, when one considers the cases discussed in this report,
both the independence of the state courts and the possible shift in a
court's position over time must be kept in mind.
*A "public purpose" in environmental cases has included a taking
for: flood control (Ocean County v. Stockhold, 129 N.J. Super. 323
A. 2d 515 (1974)), scenic beauty (Wes Outdoor Advertising Co. v.
Goldberg, 55 N.J. 347, 262 A. 2d 199 (J970))7 and urban park (King_
County v. Farri, 7 Wash. App. 600, 501 P. 2d 612 (.1972)).
2.36
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The use of nuisance law as .a deterrent to pollution and as a means
to internalize the costs of land use has a long history beginning in
English case law.* A private nuisance action has been used to abate
nearly every common form of pollution: air, ** water, *** solid waste, *:
noise,***** and sight pollution. ****** Private actions under nuisance
law presently do not internalize all the costs of land use, nor can
nuisance law as presently interpreted solve the major problems of our
environment. However, private actions can complement government
efforts.
An understanding of the private action in nuisance is essential to
understanding the legal framework wh-ich permits some externalities.
Furthermore, legislative acts can help to reduce some of the barriers
erected by the common law, which may no longer be applicable in a
society where greater exploitation of our natural resources may not
promote social welfare. ******* For these reasons, the elements of a
private nuisance, the remedies available if a nuisance is found, and
the defenses that the common law recognizes, all will be examined.
2.2. 1. 1 The Elements of a Private Nuisance
The Supreme Court in EucHd y Arnblejr ******** has found that
"a nuisance maybe merely the right thing in the wrong place, like a
pig in the parlor instead of the barnyard. "********* Even a pig in the
barnyard has been found to be a nuisance,********** but it cannol be
denied that "a nuisance may undoubtedly arise from a land use incom-
patible with the surrounding neighborhood. "*********** Thus, the
first element of a nuisance is the unreasonable use of one's land as
determined by the character of the neighborhood.
*William Aldred's Case, 77 Eng. Rep. 816 (K.B. 1611). Sec
Winfield (116) for a general history.
**Campbell v. Seaman, 63 N. Y. 568(1876).
***Johnson v. City of Fairmont, 188 Minn. 451, 247 N. W. 577 (1933).
****Lind v. City of San Luis Obispo, 109 Cal. 340, 42 P. 437 (1895).
*****Hennessey v. Carmony, 50 N. J. Eq. 616, 25 A. 374 (1892).
******Note (80).
*:!«^***5;«See note *** on p. 2.41 and accompanying text.
»«*»*«»*Euclid v. Ambler Realty Co. , 272 U.S. 365 (1926).
*********Id. at 388.
**********Baldwin v. McClendon, 292 Al. 43, 288 So. 2d 761 (1974).
***********Township of Bedminster v. Vargo Dragway, Inc. , 434 Pa. 100,
253 A. 2d 659~ (1969).
2.37
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Certain activities which maybe perfectly reasonable in industrial
areas or in the country are not suitable in residential communities.
Courts have found that a powder mill, * a factory, ** or a stable*** if
loca.ted in residential areas are nuisances, but these same activities
are surely permissible in the proper setting.
Conversely,
"It appears to be well settled that if one voluntarily elects
to live in. an industrial area, he cannot complain of noise,
noxious odors or any other unpleasant factors that may
arise from the normal operation of businesses in the area
merely because they may interfere with his personal
satisfaction or aesthetic enjoyment. It is said that no one
can move into an area given over to foundaries and boiler
shops and demand the quiet of a farm. "****
Once it has been determined that the activity is unreasonable for
the area, it must also be proven that the interference is substantial.
For instance, a slight amount of noise or smoke is permissible,*****
but the activity will be considered a nuisance if it is sufficient to "inter-
fere with the ordinary comfort of human existence, "****** The
Supreme Court uf New Hampshire considered substantial harm to be
that "in excess of the customary interferences a land user suffers in an
organized society. It denotes an appreciable and tangible interference
with a property interest. "*******
Both of these required elements introduce the possibility that a
landowner will be able to externalize the costs of his land use. The
fact that the common law condones the reasonable use of one's land as
determined by the character of the neighborhood, deprives the person
who voluntarily or through economic necessity lives in a commercial
area of a nuisance remedy. Therefore, potential polluters need only
* Cumberland Torpedo Co. v. GaLnes_, 201 Ky. 88, 255 S.W.
1046 (1923).
**RIblet v. Spokane Portland Cement Co., 41 Wash. 2d249, 248
P. ?.d 380 (1952).
':••-:-•*Johnson v. Drysdale, 66 S. D. 436, 285 M. W. 301 (1939).
****.Lee v. Florida Public Utilities Co., 145 So. 2d 299, 301 (Fla.
App. 1962).
**-:**Prosser (87), p. 79.
;;;;::.•;:***H£lmaii_y_._JA.tl^ejis Empire Laundry Co. , 149 Ga. 345, 351,
100 S.E. 207~ 210 (1919).
*******Roble v. Lillis. 112 N.H. 492, 299 A. Zd 155, 158 (1972).
2.38
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locate in the proper area to be free from compensating their neighbors
for the pollution they cause. The only apparent remedy appears to lie
in governmental action.
The second requirement for a substantial interference also per-
mits placing burdens upon neighboring landowners as long as one does
not cause a substantial interference. However, advances in science
which make detection of interference easier and prediction of the long-
term harm more certain, possibly will reduce the landowner's ability
to shift this burden upon his neighbors.
Z.Z.I.2 Remedies
Nuisance law permits two general forms of remedy, damages or
injunctive relief. Normally, if damages can be ascertained, injunctive
relief will not be available. Only if the damages cannot be determined
or if the nuisance would require continued litigation will the court per-
mit injunctive relief. These general principles, however, are not
always applied. In two recent cases, Boomer v. Atlantic Cement Co.*
and Baldwin v. McClendon, #* the courts permitted the payment of
damages which would compensate the injured party, not only for the
past and present, but for future injury as well. As the Court, in Baldwin
stated:
"The damages awarded are measxirable for all time. . . .
In that case, the measure of damages for the nuisance,
is the difference in the value of the property for a home
with and without such odor. "###
This result forces the landowner to shoulder the burden of his land use,
at least to the extent that it diminishes the value of the adjoining property.
However, if damages are not ascertainable or the damage is like-
ly to be a contimurig one, forcing constant litigation, the court may
enjoin the landowner from engaging in the activity. The Supreme Court
of Pennsylvania, when confronted with a drag strip located in a resi-
dential community, found:
-:-Boomer v. Atlantic Cement Co. , 26 N.Y. 2d 219, 257 N. E. 2d
870, 309 N.Y.S. 2d 312 (1970).
**Baldwin v. McClendon, 292 Al. 43, 288 So. 2d 761 (1974).
***Id. at 767.
2.39
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"No man has a right to take from another the enjoyment
of the reasonable and essential comforts of life and,
consequently, cannot commit acts on his own premises
calculated to interfere with the reasonable enjoyment
by others of their homes. "#
The court granted the plaintiffs' request for an injunction against
defendant's drag strip. There appears to be no discussion as to whether
the plaintiffs' damages could be ascertained, but the damage appeared
to be a continuing one.
One's remedy in nuisance law does tend to force a landowner to
pay the costs of the use of his land. Assuming damages are properly
measured, it would appear that the law, when it does find a nuisance,
places the burden of external costs upon the land user. However,
although all costs are internalized when injunctive relief is obtained,
this remedy also embodies the possibility that the enjoined land user
may be forced to discontinue an operation which could profitably be
continued even if he were required to pay the external costs.
2.2. 1. 3 Defenses in the Nuisance Law
There are numerous occasions when a nuisance is found to exist,
thus externalities are present, and the law does not provide the plan-
tiff with an injunctive remedy, and often not even with damages. There
are three doctrines that a court may apply which prohibit recovery
even after a nuisance is found; balancing the equities doctrine; coming
to the nuisance doctrine; and the prescriptive easement.**
2.2. 1. 3. 1 Balancing the Equities
The doctrine of balancing the equities sometimes requires a
court to deny a remedy to the plaintiff even if a nuisance is proven.
The courts have often examined the harm alleged by the plaintiff and
compared it to the harm that the defendant and society would suffer if
the defendant had to cease operations. Thus, in Clifton Iron Co. v.
*Township of Bedminster v. Vargo Dragway, Inc., 434 Pa. 100,
253 A. 2d 659, 662 (1969).
#*The general principles of laches may also bar recovery. See
discussion of laches, Arnovitch v. Levy, 238 Minn. 237, 56 N. W. 2d
570, 574 (1953).
2.40
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Dye, * the development of mining. Interests was judged to be more im-
portant than the pollution the defendant caused by his operations. Other
earlier cases have similar holdings, but the most articulate maybe
found in Pennsylvania^oal Co. v. Sanderson;**
"The plaintiff's grievance is for a mere personal incon-
venience; and we are of the opinion that mere private
personal inconveniences., .must yield to the necessities
of a great public industry, which, although in the hands
of a private corporation, subserves a great public interest.
To encourage the development of the great natural re-
sources of a country trifling inconveniences to particular
persons must sometimes give way to the necessity of a
great community. "#**
The defendant not only was encouraged to continue his activity, but the
plaintiff was not even given money damages. When society's interests
are aligned with the defendant, the balance of equities invariably will
favor the polluter and not the plaintiff seeking relief.
Similarly, the defendant's own financial interests must be exam-
ined to determine:
"If the resulting damage. . .because of the nuisance cannot
be avoided, or only at such expense as would be practically
prohibitive to a person in the enjoyment of his own land,
he (the defendant) may not be required to abate the
nuisance. "#***
In this recent Pennsylvania case, the Commonwealth was attempting
to stop the pollution of a stream, but lost because of its inability to
formulate a practical plan of abatement.
*Clifton Iron Co. v. Dye, 87 Ala. 468, 6 So. 192 (1888) and see
40 ALR 3d 601.
**Pennsylvania Coal Co. v. Sanderson, 113 Pa. 126, 6A. 453
(1886).
***I_d_. at 149, 6A. 459.
**-:-•«Commonwealth v. Wyeth Laboratories, 12 Pa. Cmwlth Ct. 327,
315 A. 2d 648, 653 (1974).
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There have been a few early cases which supported the plaintiff's
right to have the nuisance abated without balancing the equities. * How-
ever, in many jurisdictions these cases have been ignored-:-* and in the
majority of jurisdictions the balancing doctrine is applied.***
Balancing the equities permits externalities to continue, as long
as courts view society's interest in terms of exploitation of natural
resources and increased production. Society's real interest (e.g.,
protecting the environment) may lie in granting the injunction and stop-
ping the pollution. Courts have so far been unwilling to weigh society's
intangible interests against the tangible economic detriment to the
defendant and community.
2.2.1.3.2 Coming to the Nuisance
The coming to the nuisance doctrine prevents the plaintiff from
recovering because:
"One who voluntarily places himself in a situation where-
by he suffers an injury will not be heard to say that his
damage is due to the nuisance maintained by another. "****
The parallels between this doctrine and the reasonable use require-
ment for finding the existence of a nuisance are readily apparent. Both
permit a nuisance to continue if it has been established in the locality.
Apparently, the only element that the defendant must prove is
that the plaintiff knew of the nuisance when he came to the locality.
Thus, a person who moves next to a golf course cannot complain that
golf balls are falling on his property. *****
*Wente v. Commonwealth Fuel Co. , 232 111, 526, 83 N.E. 1049
(1908); Hennessey v. Carmony, 50N.J. Eq. 616, 25 A. 374(1892);
Sullivan v. Jones & Laughlin Steel Co. , 208 Pa. 540, 57 A. 1065 (1904);
Whaland v. Union Bag & Paper Co. , 208 N. Y. 1, 101N.E. 805(1913).
**Ha_ack v. Lindsay Light & Chemical Co. , 393 111. 367, 66 N.E.
2d 391 (1946); Boomer, supra note * on p. 2.39.
***See 40 ALR 3d 601.
»»»*Qetjen v. Goff Kirby Co. , 38 Ohio L. Abs. 117, 124, 49 N. E.
2d 95, 99 (Ct. App. Cuyahoga County, 1942).
*****Patton v. Westwood Country Club, 18 Ohio App. 2d 137, 247
N.E. 2d 761 (1969).
7.42
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The conning to the nuisance doctrine gives a polluter of long
standing almost blanket protection against successful attack under the
nuisance law, thus permitting the externality to continue ad infinitum.
2. 2. 1. 3. 3 Prescriptive Easement
If the polluter has been engaged in his activity long enough, he
may be able to continue the activity because he has a prescriptive right.
One commentator has described the situation as follows:
"If the pollution has been continuing for some time, the
polluter's wrongdoing may have ripened into a judicially
protected right. . .which. . . rewards wrongdoers who arc
patient, persistent, and non-reforming. ";::
There are at least two elements which a polluter must prove in
order to establish a prescriptive easement. First, there must be a
continuous polluting activity through time and, second, there must exist
a definite level of pollutants over time. *'•'•' A recent Oregon case demon-
strates how a court may liberally interpret these requirements and thus
permit the polluting activity to continue. ##* The plaintiff's land was
periodically flooded because of a dam built upon the defendant's property
The court found that there was continuous polluting activity, even though
there were intervals between the flooding of as long as a year or two.
The court also discussed the need for a definite level of pollutants and
concluded:
"All that is necessary to meet the requirement of
definiteness where there is a variation in the area
invaded is that the maximum or outer limits of the
interference be established. "****
The prescriptive easement may have the same effect as the com-
ing to the nuisance doctrine, namely, once the pollution has occurred
*Juergensmeyer (52), p. 1136.
**See West Kentucky Coal Co. v. Rudd, 328 S. W. 2d 156, 160
(Ky. 1959).
««*Arrien v. Levanger, 263 Qr. 363, 502 P. 2d 573 (1972).
****Id. at 575.
2.43
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for a long enough period, the nuisance laws may not provide a remedy,
thus permitting the externality to continue. Legislative changes of these
common law defenses would increase the ability of private individuals
to correct environmental problems.
2.2. 1.4 Nuisance Actions Against
the Governjnent
Up until this point it has been assumed that the tort feasor in the
nuisance action was a private party. A nuisance action may also be
instituted against most government entities. The private nuisance law
(hat the court will apply should not differ depending upon the nature of
the defendant. However, some government entities have retained all
or part of their sovereign immunity from tort liability which may bar
recovery.
The Federal government has permitted tort suits against it in
the Federal Tort Claims Act, with certain important limitations.*
First, claims cannot be based upon the exercise or failure to exercise
a discretionary [unction. #* Second, the courts have required that
negligence or wrongdoing must be alleged. *** However, beyond these
exceptions,
"The United States shall be liable respecting the pro-
visions of this title relating to tort claims, in the
same manner and to the same extent as a private
individual under like circumstances...
The situation regarding state immunity varies from jurisdiction
to jurisdiction. Some jurisdictions, like Washington, have no sovereign
immunity, ***** while other states have no immunity but have Tort Acts
*28 U.S.C. §1346 (1970).
**28 U.S.C. §2680 (1970).
#*#See Dalchite v. United States, 346 U.S. 15, 44 (1953).
****28 U.S.C. 12674 (1970).
*****Wash. Rev. Code S4.92.090 (Supp. 1971).
2.44
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similar to the Federal legislation. * Even where tort liability is per-
mitted, the state may have retained immunity if a discretionary func-
tion is involved or if a statute authorizes the nuisance.
Clearly attempting to internalize the costs of the government's
use of land is more difficult than in private cases. However, success
against government entities under a nuisance is possible and has been
obtained. ##
2.2.2 The Inherent Conflict: Taking
Versus the Police Power
It was seen in the area of nuisance law that the courts recognized
two conflicting principles: the right of a landowner to use his land and
the duty of a landowner not to interfere with the rights of others. The
resolution of this conflict by the courts permitted numerous instances
of externalities, either because a nuisance was not present or because
a defense was available to the polluter.
The property rights of a private landowner in relationship to the
government also contain conflicting legal principles. Government has
the inherent right to protect the health, safety, morals, and general
welfare of the people. The police power was described by the Supreme
Court as:
"One of the most essential powers of government, one
that is least limitable. It may, indeed, seem harsh in
its exercise, usually is on some individual, but the
imperative necessity for its existence precludes any
limitation upon it when not exerted arbitrarily. "**-:=
Thus, the police power should be a formidable tool for government to
regulate the use of land, and is a basic part of the property relation-
ship between the government and a private landowner.
The Fifth Amendment of the Constitution of the United States
prohibits the taking of property without just compensation. This pro-
vision is a "seemingly absolute protection" against the possibility of
*Cal. Gov't. Code §810-895.8 (West 1966).
**See Nestle v. City of Santa Monica, 6 Cal. 3d 920, 496 P. 2d
480, 101 Cal. Rptr. 568 (1972).
***Hadachck v. Sebastian, 239 U.S. 394, 410 (1915).
2.45
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the government appropriating a private party's property without com-
pensating the owner.* It too is a basic part of the property relationship
between the government and a private landowner.
In Pennsylvania Coal Co. v. Mahon, ** the Supreme Court found
that the police power qualifies the protection granted under the Fifth
Amendment. Justice Holmes, speaking for the Court, concluded:
"The natural tendency of human nature is to extend the
qualification more and more until at last private prop-
erty disappears.. . We are in danger of forgetting that
a strong public desire to improve the public condition
is not enough to warrant achieving the desire by a
shorter cut than the constitutional way of paying for the
change. "***
Since the decision in Pennsylvania Coal Company the state courts
have struggled to strike the proper balance between the police power
qualification and the seemingly absolute prohibition against taking prop-
erty without paying just compensation. As in the area of nuisance law,
since the state courts are independent, there is a lack of uniformity
among the state decisions.
A further complication in this area exists because many states
have constitutional provisions similar to the Fifth Amendment prohib-
ition against taking, while other states have prohibitions not only
against taking, but also against damaging one's property without com-
pensating the owner. **** Normally in the context of environmental
quality this distinction is unimportant, but the reader should be aware
that state constitutional provisions do exist that are somewhat different
from those of the Fifth Amendment.
Numerous commentators have attempted to rationalize the cases
which involve the conflict between a government's ability to regulate
^Pennsylvania Coal Co. v. Mahon, 260 U.S. 393, 413 (1922).
_
***Id. at 413.
****See P. Nichols, Eminent Domain, §6.1 (3rd Rev.) 1974.
2.46
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and its inability to take private property without just compensation. *
Numerous tests have been devised, all seemingly unable to reconcile
the court decisions.** For organizational purposes, the cases will be
divided between those where diminution of property values was con-
sidered a taking requiring compensation and those where the diminution
was permissible under the police power.
2.2.2.1 Diminution of Property Value
Sufficient for Taking
The Supreme Court, in Pennsylvania Coal Co. v. iMahon, stated
the diminution of value test:
"Government hardly could go on if, to some extent, values
incident to property could not be diminished without paying
for every such change in the general law. .. One fact for
consideration. .. is the extent of the diminution. When it
reaches a certain magnitude, in most cases if not all cases
there must be an exercise of eminent domain and compensa-
tion to sustain the act. "***
Since the Pennsylvania Coal decision, courts have strivcd to determine
what magnitude of diminution is the "certain magnitude" mentioned by
Justice Holmes. Courts have concluded that neither financial hardship
nor substantial diminution is sufficient for a taking, but have instead
required "a property owner be unable, permanently, to use his prop-
erty. ..and is therefore deprived of all beneficial use thereof... "**#*
Despite what appears to be an insurmountable burden for a plaintiff,
many property owners in environmental cases have succeeded in satis-
tying the test.
In Morris County Land Improvement Co. v. Township of
Parsippany-Troy Hills, ***** zoning regulations had created a meadow-
lands to promote flood control. The uses permitted the plaintiff were
*See Michelman (73).
**Id. at 1202.
***260 U.S. at 413.
* * * *Bureau of Mines of Maryland v. George's Creek Coal and Land
Co. , Md. , 321 A. 2d 748, 762 (1974) and cases cited therein.
****;;:40 N.J. 539, 193 A. 2d 232 (1963).
2.47
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very limited and severely reduced the property's value. The New
Jersey Supreme Court concluded that the regulations "are clearly far
too restrictive and as such are constitutionally unreasonable and con-
fiscatory. "* The court, in determining the property's value, examined
not only its present value as a swamp, but its potential value if filled.
For that reason there was a great diminution of value, which resulted
in a taking without compensation as opposed to a permissible regulation.
In State v. Johnson, ** the State "Wetlands Control Board attempted
to prohibit the filling of coastal wetlands. The landowner argued that
such a regulation made his property "commercially valueless land. "***
The Supreme Court of Maine agreed, holding that the prohibition
amounted to a taking of property without just compensation, and an
unreasonable exercise of the police power. As in the Morris case, the
value of the property included its potential after land fill.
In Dooley v. Town Plan and Zoning Commission of Town of
Fairfiold, **** the plaintiff's property was zoned as a flood plain with a
limited number of uses, and in fact, the court found that "use of the
plaintiff's land has been, for all practical purposes, rendered impos-
sible. "***** The diminution in value was estimated to be approximately
75 percent, which the Supreme Court of Connecticut found to be a taking
without just compensation.
A case which also found that the zoning board had exceeded its
police power was Vernon Parking Realty Co. v. City of Mount
Vernon. ****** This case differed from those previously discussed in
that it attempted to maintain a commercial use which was considered
beneficial. The plaintiff's property was used as a parking garage and
the zoning board wanted to assure future parking availability so it
designated a downtown area which included palintiff's property as a
"Designated Parking District. " The court found that the restriction
"destroyed the greater part of the value of the property, "******* forcing
him to carry the burden of providing parking.
*193 A. 2d at 242.
**265 A.2d 711 (Me. 1970).
***Jd_. at 716.
****151 Conn. 304, 197 A.2d 770 (1964).
*#***!97 A. 2d at 772.
******307 N. Y. 493, 121 N.E. 2d 517 (1954).
******* 121 N.E. 2d at 520.
2.48
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Even when a zoning board attempts to plan growth in a community,
a substantial diminution of plaintiff's property for an unreasonable
period of time is considered a taking without just compensation. In
Averne Bay Construction Co. v. Thatcher, * the plaintiff owned land in
Brooklyn which was zoned residential. There was no current demand
for housing and no demand was expected for some time. The New York
Court of Appeals permitted the plaintiff to build a gas station, arguing
that only temporary diminution of value was permissible under the
police power.
Zoning plans have also been held to go beyond the police power
when they indirectly depress the price of the plaintiff's property. In
Miller v. Beaver Falls,** the plaintiff's land was planned as a park,
thus greatly reducing its present value. The court found this diminu-
tion was a taking requiring compensation and not a valid exercise of the
police power.
The effect of these decisions on the governmental cost of provid-
ing environmental quality is clearly adverse. Cases like Morris
County, Dooley, and Johnson hinder government's efforts to protect
the population and the environment from the hazards of flooding. On
the other hand, permitting the regulation would place an unreasonable
burden on an individual for a benefit that the entire society will receive.
Cases like Miller and Averne Bay reduce a government's ability
to rationally plan for future growth. The result of these types of cases
is to permit urban sprawl. But, again, permitting the regulation
appears to place a great burden upon the individual for the benefit of
society in general.
2.2.2.2 Diminution in Value
Without a Taking
An early case permitting extreme diminution of value within the
police power was Hadachek v. Sebastian. *** Despite the plaintiff's
loss of nearly 90 percent of the value of his property, the court found
*278 N. Y. 222, 15 N.E. 2d 587 (1938).
**368 Pa. 189, 82 A. 2d 34 (1951).
***Hadachck v. Sebastian, 239 U.S. 394, 410 (1915).
2.49
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no taking, commenting that the exercise of the police power is some-
times "harsh."
Recently, courts have again begun to permit substantial diminu-
tion, verging on total deprivation, without compensation. The zoning
board, in Turnpike Realty Co. v. Town of Dedham, * established a
flood plain district very similar to the cases just mentioned. However,
the result was vastly different. The diminution of the plaintiff's land
was approximately 90 percent, but the Massachusetts Supreme Court
concluded:
"We realize that it is often extremely difficult to deter-
mine the precise line where regulation ends and con-
fiscation begins. The result depends on the 'peculiar
circumstances of the particular instance'. .. In the case
at bar we are unable to conclude, even though the judge
found a substantial diminution in the value of petitioner's
land, that the decrease was such to render it an uncon-
stitutional deprivation of property. "**
The Massachusetts Supreme Court's analysis is not vastly different
from those earlier cases discussing diminution. The only difference
is that it expands police power qualification of the Fifth .Amendment
prohibition against taking without just compensation. Clearly, environ-
mental quality can be improved under the existing legal system if a
court follows the Massachusetts example of expanding the police power.
A Wisconsin case, Just v. Marinette County, *** approaches the
diminution problem from a different perspective. In Just, the plaintiff
attempted to fill some property along a shoreline. However, this fill-
ing was prohibited by the zoning ordinance. The zoning board fined the
Justs and the conviction was appealed. The court basically redefined
the proper value that should be considered in determining whether there
has been a substantial diminution of value.
*284 N.E. 2d 891 (Mass. 1972).
**Id_. at 894,
***56 Wis. 2d 7, 201 N.W. 2d 761 (1972).
2.50
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"The Justs argue their property has been severely
depreciated in value. But this'depreciation of value is
not based on the use of the land in its natural state but
on what the land would be worth if it could be filled and
used for the location of a dwelling. While loss of value
is to be considered in determining whether a restriction
is a constructive taking, value based on changing the
character of the land at the expense of harm to public
rights is not an essential factor or controlling. "*
Thus, the court found that the "natural use" value of the property
should be considered in determining whether or not there was substan-
tial diminution of value.
In Golden v. Planning Board of Town of Ramapo, #* the court
reevaluated the effect of a comprehensive growth plan. The court
found that the plan was necessary since present municipal services
were inadequate. Despite a. finding that the regulations were substan-
tial and might prevent development for 18 years, the court found a
valid exercise of the police power since the taking was not absolute.
The court's analysis did not differ from Averne which was cited in
support of the court's position. The real difference rested upon the
court's determination that 18 years was a reasonable period of restric-
tion.
These three cases represent a new approach to environmental
problems in the context of the taking issue. The Just case may be
especially significant, in that not only does it view regulation in terms
of the "natural use" of the land, but its method of valuation of the prop-
erty would permit greater purchases by the government.
The Ramapo decision may also be significant to the extent that
courts will permit longer periods in which the owner may be deprived
of any economic use of his property. These periods would hopefully
permit more effective planning by zoning boards.
*Id_. at 23, Id. at 771.
**30 N.Y. 2d 359, 334 N. Y. S. 2d 138, 285 N.E. Zd 291 (1972).
2.51
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While these decisions may promote environmental quality by
prohibiting land uses that were previously permitted, they do not effec-
tively force the internalization of land use costs. Rather, decisions
like Just and Turnpike Realty merely deprive an owner of the use of
his land, even in situations where the landowner could afford to pay the
full costs of the land use. Similarly, Ramapo acts as a total deprivation
during the planning years, even in those situations where the prospec-
tive land use is economically capable of paying its full costs.
2. 2. 3 Synthesis
An examination of both nuisance law and governmental regulations,
as permitted by the courts today, allows a number of conclusions.
First, there are significant barriers to an effective remedy in a private
nuisance action. Legislative initiative may be able to reduce, if not
eliminate, the major problems. However, once the court decides to
grant relief, nuisance law is a relatively effective method of internaliz-
ing land use costs. Decisions like Boome r and Baldwin may.provide
an alternative to the sometimes harsh remedy of granting injunctive
relief, and serve the purpose of internalizing most of the costs of land
use.
Second, the ability of the government to protect the environment
through police power regulations may be increasing because of the
greater awareness of environmental problems. However, regulation,
in the nature of total prohibition, seems ill-suited to an efficient eco-
nomic system. Total prohibition does not discriminate between land
uses capable of paying their total costs and uses which are incapable
of doing so. Thus, traditional notions of property rights tend to per-
petuate the externalization of costs and environmental deterioration.
2. 3 Conclusions
The preceding legal analysis clearly demonstrates that neither
the prevailing nor the emerging judicial interpretations of property
rights are capable of producing an economically efficient resolution of
all externality situations. Moreover, the economic analysis of Section
2.2 establishes the impossibility of developing any single mechanism
for the internalization of externalities which will uniformly be the
socially most desirable internalization mechanism in. all externality
situations.
2.52
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Consequently, in any specific externality situation, the identifica-
tion of the most appropriate inte rnalization mechanism must rely upon
a careful evaluation of the relative strengths and weaknesses of all
feasible alternative internalization mechanisms which might be imple-
mented in that situation. Recognizing that substantial differences exist
between the characteristics of different externality situations, it is not
unreasonable to expect that the application of this method of identifying
the socially most desirable internalization mechanism for each partic-
ular externality situation will result in the simultaneous implementation
of a variety of different internalization mechanisms in different situa-
tions.
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3.0 A CRITIQUE OF TRADITIONAL
LAND USE CONTROL MECHANISMS
Regulation of the use of private real property is practiced by
virtually every political jurisdiction in the United States through the
enactment and implementation of municipal zoning processes, subdivi-
sion regulations, building codes, eminent domain condemnation proce-
dures, and various other mechanisms. This chapter investigates the
administrative, economic, judicial, legal, and political problems
which arise in the application of these land use control techniques.
Thus, Section 3. 1 enumerates the practical difficulties which
are encountered by municipalities in their development and utilization
of municipal zoning techniques. In addition, this section describes the
additional powers and complexities which are introduced into the munic-
ipal zoning process by the availability and use of complementary land
use control mechanisms such as subdivision regulation and building
codes. Section 3.2 similarly identifies the operational problems
which arise in the exercise of the right of eminent domain to control
the pattern of development of a municipality or a region. Finally,
Section 3. 3 contains some brief conclusions concerning the implica-
tions of this chapter relative to the continued usefulness of these tradi-
tional mechanisms as land use control techniques.
3. 1 Municipal Zoning
3. 1. 1 The Nature of Municipal Zoning
The nature of municipal zoning may be best examined by evalu-
ating the provisions contained in the Standard State Zoning Enabling
Act.* But first, it is necessary to understand the purpose of an
enabling act. It must be realized that local governments, without a
grant of power from the state, have no power to zone. Even if a
municipality is granted general police powers, the municipality may
not have the power to zone.** Therefore, municipal governments
*Standard State Zoning Enabling Act (107).
**See City of Searcy v. Robinson, 224 Ark. 344, 273 S.W. 2d 26
(1954) and Stevens v. City of Salisbury, 240 Md. 556, 214 A. 2d 775
(1964).
3.1
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need a specific grant of power to zone. This grant could occur through
legislative or constitutional home rule provisions, but most often the
power to zone is granted in an enabling act.
Every state has an enabling act, most of which are based on the
Standard State Zoning Enabling Act (SZEA). The provisions of SZEA
contain numerous limitations on the municipality's power to zone.
Both the power granted and the limitations on it will be examined in
order to help understand current zoning practices.
Section 1 of SZEA contains the general grant of power to restrict
and regulate, among other matters, the size of buildings, the density
of population, the location and use of buildings or other purposes. The
power to restrict and regulate various matters is limited to "promoting
health, safety, morals, or the general welfare of the community. "
Actions taken which do not promote these specific goals are not per-
mitted under the enabling act.
The power to divide the municipality into districts is contained
in Section 2. Within the districts the regulations must be uniform "for
each class or kind of buildings throughout each district, but the regu-
lations in one district may differ from those in other districts. " This
requirement for homogeneity within a district is sometimes the basis
for holding certain zoning practices invalid, such as spot zoning, con-
tract zoning, or conditional zoning.
Section 2 also contains provisions for regulating the use of build-
ings and land within a district. Three general uses have been devel-
oped: residential, commercial, and industrial. Within each general
use, there are often a number of subclasses. Single family residential
is considered to be the highest use of land and is exclusive, meaning
that no other use is permitted. In the past, uses havg been cumulative,
permitting higher uses to locate in lower use districts. Recently, the
concept of use districts has been changing, often making every district
exclusive or by differentiating between uses through performance
standards. *
The requirement that the regulations so far discussed must be
contained in a comprehensive plan is presented in Section 3 of SZEA.
The purpose of the comprehensive plan is to eliminate "haphazard or
*See discussion, Section 3. 1,5.3, infra.
3.2
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piecemeal zoning. "# The result of this requirement is to invalidate
many zoning decisions which are not pursuant to a comprehensive plan
or are inconsistent with the plan.
While the comprehensive plan provides uniformity and stability,
the act does permit the plan to be amended or changed, which intro-
duces flexibility into the zoning process.** Further flexibility is pro-
vided in Section 7, where a board of zoning appeals may be created
and empowered to "hear and decide special exceptions" and "to author-
ize upon appeal in specific cases such variances from the terms of the
ordinance as will not be contrary to the public interest. "##*
Besides amendments, special exceptions, and variances, zoning
ordinances almost always contain provisions which permit nonconform-
ing uses to continue in a district. Permitting nonconforming uses to
continue is another means of providing relief from the restrictions
imposed by the comprehensive plan. In the case of a nonconforming
use, a use which pre-exists the adoption of the zoning ordinance is
permitted to exist, even though it would not be permitted to be devel-
oped under the zoning ordinance.
A number of restrictions on nonconforming uses have been
created. An owner of a nonconforming use cannot enlarge the use. If
the use is terminated, either by the owner or through destruction of the
premises, the nonconforming use will usually not be permitted to be
reestablished. Finally, the use may be forced to discontinue, because
it creates a nuisance. ****
Recently, zoning ordinances have forced the nonconforming use
to discontinue after a certain period of time. This length of time
depends upon the investment in the property and the ease of utilizing
it for a conforming use. Thus, nonconforming uses of land where
there is little capital investment and no impediment to using the land
for a conforming use are given a short period of time to terminate.
On the other hand, large, specialized buildings, which involve consid-
erable investment and are not easily converted, are given much longer
periods of time before they are forced to terminate.
*See Standard State Zoning Enabling Act (107), Note 22.
**Standard State Zoning Enabling Act (107), Section 5.
*#*Standard State Zoning Enabling Act (107), Section 7.
****Hadachek v. Sebastian, 239 U.S. 394(1915).
3. 3
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It can be seen that the power to zone gives the municipality the
ability to restrict and regulate a wide range of activities. The scope
of the municipality's power over land uses is even broader when viewed
in connection with the municipality's control over building codes and
subdivisions. Building codes permit the muncipality to regulate the
construction of new buildings. Subdivision regulation is concerned
with regulating a landowner's division of his property into parcels.
Among other restrictions imposed on the landowner, he may have to
dedicate some property for streets, school sites, or parks. Often the
regulations go further and require the subdivider to build the streets
and utilities required by the subdivision.
These powers, while extremely great, are not without their lim-
itations. Often zoning boards may aot act for any proper purpose or
pursuant to a comprehensive plan. When disagreement exists between
the municipality and the landowners over these or other matters, judi-
cial review is required.
3.1.2 Judicial Review
Judicial review from decisions of the board of zoning appeals are
specifically provided for in Section 7 of S7,EA. Yet, judicial review is
not limited to decisions of the board of zoning appeals. The courts can
also review the validity of the entire ordinance or the validity of the
ordinance as applied to a particular parcel of land.
When the plaintiff seeks to have the entire ordinance declared
invalid, there are two possible arguments that may be raised. First,
the ordinance may be challenged on the grounds that it does not con-
form to the requirements of the enabling act. Some of the deficiencies
alleged are that the ordinance does not have a comprehensive plan, that
the municipality is not divided into districts, or that there is not the
required homogeneity within a district.
Second, the ordinance may be challenged on constitutional grounds.
The constitutional arguments center on the ordinance's denial of either
equal protection or due process. The equal protection clause usually
is invoked when a municipality treats two uses in a different manner,
even though there appears to be no real distinction between the uses.
For instance, prohibiting drive-in restaurants while permitting
enclosed ones or permitting public facilities like a warehouse or
school and prohibiting private ones, are examples of situations where
the equal protection clause may be violated.
3.4
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The due process clause is often invoked when the zoning ordi-
nance either does not further a legitimate purpose or when the ordi-
nance is not related to the furtherance of a desired goal. Again, it
must be stated that zoning regulations must be enacted to promote the
health, safety, morals or general welfare. Regulations enacted for
other purposes are not permissible. Furthermore, if the plaintiff can
show that the ordinance does not promote a permissible objective, the
ordinance will be declared invalid. It must be remembered that when
the constitutionality of the ordinance is questioned, the plaintiff has
the burden of proving that the ordinance is unconstitutional.
The landowner, instead of attacking the validity of the entire
statute, may also challenge it as applied to his particular property.
There are a number of reasons why the ordinances may be invalid in
its application to a particular piece of property. These include situa-
tions in which ordinances deny the property owner any use of his land,
impose heavy restrictions which are not required to serve a public
purpose, or have no substantial relationship to the health, safety,
morals, and general welfare. It should be recognized that many of
these possible reasons for declaring an ordinance invalid are over-
lapping.
Judicial review of zoning ordinances and decisions by zoning
boards protect the property owner from being subject to arbitrary and
capricious regulation of his property. Resort to the courts, while
expensive and time consuming, does result in the imposition of the
limitations of the zoning power contained in the enabling act and the
Constitution.
3. 1.3 Techniques to Provide
Flexibility in Zoning
Numerous techniques are permitted to give zoning the flexibility
required in order to serve the individual property owner and the com-
munity. Each technique has certain legal criteria which must be met
before the petitioner is entitled to the relief that he seeks. If the peti-
tioner can demonstrate that the criteria are met, relief should be
granted. In cases where the zoning board rules against the petitioner,
review can always be obtained in the courts.
3.5
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3.1.3.1 Rezoning
In Section 5 of SZEA, specific authorization is given to amend
the zoning regulations. Normally, a petitioner requests that the zoning
board rezone the property to a different zone, for example, from light
industry to heavy industry. However, the petitioner may also ask the
zoning board to consider adding a particular use to the zone, such as
permitting an assembly plant which creates no noise or pollution to
exist under the light industry zone, when it may have been permitted
only in the heavy industry zone.
Zoning map amendments should be granted if the present zoning
is not suitable for the property, where there is undue hardship, or
when there has been a change of circumstances since the last zoning.
3. 1. 3. 2 Conditional Zoning
Unlike contract zoning, where the zoning board and the property
owner enter into a binding agreement, conditional zoning involves the
property owner's restricting his use of his land, without receiving a
binding promise from the board. Of course, it is the hope of the land-
owner that the board will voluntarily take the action that the property
owner desires. The difference between contract zoning and conditional
zoning makes conditional zoning a permissible technique for creating
flexibility, while contract zoning is not permissible.* However, some
conditional zoning situations may not be permitted, since they are con-
sidered to be spot zoning.**
3.1.3.3 Variances
Variances are probably the most widely used technique to provide
flexibility in zoning. Unfortunately, along with its wide use, there is
a great amount of misuse. Variances are permissible only when there
is no adverse effect upon the public nor the surrounding neighborhood
and only if there are particular characteristics of the property which
make it deserving of special consideration. If the zoning would result
in unnecessary hardship, a variance should be granted.
*See discussion, Section 3.1.4.2, infra.
**See discussion, Section 3. 1.4. 1, infra.
3.6
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3,1.3.4 Special Exceptions
Special exceptions, like variances, are permitted by SZEA. A
special exception is similar to a variance in that a showing must be
made that neither the public nor adjacent property owners will be
unduly harmed. However, with a special exception there is not need
to show that unnecessary hardship exists.
Probably the most distinguishing feature of special exceptions is
the lack of guidelines. The lack of guidelines to control administrative
discretion is often responsible for having the special exceptions ruled
invalid.
3. 1.4 Impermissible Zoning Techniques
Not all decisions made by a zoning board are permissible under
the zoning ordinance. Affected property owners can challenge in the
courts a board's decision to apply any of the flexibility techniques pre-
viously discussed. Furthermore, the board's decision can be chal-
lenged as being spot zoning or contract zoning, both of which are
impermissible.
3.1.4.1 Spot Zoning
Spot zoning involves permitting a property owner to use his prop-
erty for a use which is not permitted to neighboring parcels of land.
Thus, the zoning board creates an "island" which gives the property
owner benefits not enjoyed by neighboring landowners. Also involved
in spot zoning is the granting of benefits to a particular landowner when
it it not in the public interest to do so. Lastly, spot zoning does not
conform to the comprehensive plan of the municipality.
The courts have concluded that spot zoning is invalid because it
violates the comprehensive plan requirement, the need for uniformity
within a district, and is contrary to the general welfare of the com-
munity.
3.1.4.2 Contract Zoning
Contract zoning is another impermissible technique that has
sometimes been used by zoning boards. Contract zoning involves the
negotiation of a binding agreement between the landowner and the zoning
board. The landowner generally agrees to restrict the use of his land,
while the zoning board agrees to zone the property for a particular use
and to refrain from changing the zone.
3.7
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Contract zoning often violates the same principles that were
mentioned in spot zoning. Furthermore, the courts have concluded
that it is not proper for the municipality to bargain away its future
exercise of the police power.
3.1.5 Expanding Environmental
Criteria for Zoning
3. 1. 5. 1 Aesthetic Zoning
At one time it was thought that a zoning decision based on aes-
thetic considerations was not permissible under the enabling act. How-
ever, court decisions in some jurisdictions have found that aesthetic
considerations are included within the general welfare provision of the
enabling act. The leading case supporting this proposition is Berman
v. Parker,* which is actually an eminent domain case. At least three
states consider aesthetic considerations alone to be sufficient to justify
a zoning decision, while a few more jurisdictions have stated that aes-
thetics may be a valid criterion, but have not directly ruled on the
issue.-"*
The majority of states do not recognize aesthetic considerations
as being part of the general welfare. This result may be due to the
courts' hesitancy to impose one group's taste upon the remainder of
the community.
3,1.5.2 Design Standards
Design standards or architectural controls are a form of aes-
thetic zoning which so far have not been widely accepted. There have
been a few cases which have upheld ordinances restricting the archi-
tectural design of buildings, *** It would appear that zoning decisions
based upon design standards are still in a very early period.
3.1.5.3 Performance Standards
Traditionally zoning maps were divided into zones that were
classified according to the uses that were permitted or excluded from
*348 U.S. 26 (1954).
**See Masotti and Selfon (69), pp. 773-778.
***State ex rel Saveland Park Holding Corp. v. Wieland, 269 Wis.
262, 69 N. W, 2d 217 (1955) and Reid v. Architectural Board of Review,
119 Ohio App. 67, 192 N.E. 2d 74 (1963).
3.8
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the zone. Recently these classifications have begun to be replaced by
performance standards which instead of regulating the types of activ-
ities that may exist in a zone, regulate the amount of noise, odor, and
other characteristics that are permitted in the zone. Thus, instead of
excluding a steel mill from a light industrial zone, under performance
standards the mill would be permitted if it met the particular perform-
ance requirements for the zone.
The advantage of these standards is the ability to more effec-
tively control the characteristics of a zone, without resorting to a
detailed list of particular industries that are permitted or excluded
from the zone. Under performance standards any firm is permitted
as long as it conforms to the zone's standards.
3. 1. 5.4 Population Density Controls
The enabling act specifically authorizes zoning decisions to con-
trol the population density. The two most widely used techniques for
controlling population density are minimum lot sizes and minimum
floor space. The minimum lot sizes have been held valid for lots as
large as five acres. On the other hand, a number of courts have held
that minimum lot sizes do not promote the health, safety, morals, and
general welfare of the community and are thus invalid. Courts have
been especially suspicious of minimum lot sizes which appear to be
excluding poor persons from the community.
Minimum floor space has not received very favorable treatment
with the courts. This is true probably because there appears to be no
relationship between minimum floor space and the purposes of zoning.
Even as a health purpose, the courts have been unwilling to uphold
minimum floor space requirements.
3. 1. 5. 5 Planned Unit Development
A planned unit development involves the taking of a parcel of land
and developing it as a single entity. This may or may not include a
combination of residential and commercial uses. The zoning board
views the development as a single unit, not from the perspective of
each individual lot. The zoning board may place limits as to the num-
ber of units that it will permit, which is a form of controlling popula-
tion density. Usually, while the number of units are controlled, the
type of structure and its location in the development is left to the dis-
cretion of the developer. This type of zoning has been upheld under
the enabling act.
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3.1.5.6 Flood Plain Zoning
Flood plain regulations have been added to many enabling acts.
Generally, flood plain regulation involves restricting buildings which
may block the water channel or controlling the intensity of use of the
flood plain. Often the ordinances permit compatible uses such as golf
courses or parks. However, some ordinances have been held to be
unconstitutional takings, since they deprive the property owner of any
reasonable use of his land. Normally, if a reasonable use is permitted
and if there is a risk of flood damage if a building is constructed, the
ordinance will be held valid.
3. 1.6 Structural Limitations of Zoning
Although municipal zoning potentially is capable of having a sub-
stantial impact upon the pattern of development of real property, its
influence is not unlimited.
3. 1. 6. 1 The Negativity of Zoning
Zoning is essentially a negative control. It can specify only the
types of development which may not be located in a particular area.
It cannot specify the types of development which will be located in that
area. * Thus, the zoning of a substantial portion of a municipality for
industrial use will be unsuccessful in attracting industry unless eco-
nomic conditions are conducive to industrial development at those loca-
tions.** Similarly, zoning is incapable of discouraging the withholding
of land from development for speculative purposes. Consequently, it
is not uncommon to observe the residential development of property
which is relatively remote from an existing center of population prior
to the residential development of equally suitable property which lies
between these two locations despite the residential zoning of this inter-
vening property. In fact, somewhat paradoxically, this pattern of
development in many instances may be encouraged by the zoning of
this intervening property. If this property has been zoned for very
low density residential use through large-lot zoning practices, devel-
opers responding to a demand for high density residential development
may be forced to bypass this property and, instead, to develop more
remote property which is zoned appropriately for their purposes.
*Witheford and Kanaan (117), p. 19.
**Siegan (106), p. 97.
3. 10
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Obviously, this pattern of intermittent development imposes both unnec-
essarily high public facilities costs upon all residents of the community
and unnecessarily high travel costs upon, at least, the residents of the
new residential development.*
3. 1. 6. 2 Limited Retrospective Application
The extent to which municipal zoning regulations can promote the
modification of nonconforming uses is limited. Although the zoning
process can effectively prohibit the expansion of a nonconforming use,
judicial concern for the protection of the private property rights of the
owner of this use generally has produced a stipulation that the zoning
process may require the elimination of a nonconforming use only in
certain extreme circumstances, such as the voluntary discontinuation
of the use for more than a specified period of time or the destruction
of the use by natural causes. Although this stance has been relaxed
recently in some jurisdictions by judicial decisions which permit munic-
ipalities to require the elimination of any nonconforming use after a
reasonable amortization period, it remains true that the ability of
municipal zoning to modify the pattern of development of developed
areas is severely circumscribed. Consequently, the major potential
of municipal zoning is focused upon control of the prospective develop-
ment of vacant land. •'•'•*
3. 1. 6. 3 Limitations of the Police Power
The police power of the state is derived from the inherent right
of the government to protect the health, safety, morals, and general
welfare of the people. However, this power is limited by the constitu-
tional restriction that private property may not be taken by the govern-
ment without the payment of just compensation. This restriction
imposes certain constraints upon the ability of municipal zoning to
control the development of private property. For example, the zoning
of private land for exclusive use as public open space must be consid-
ered a taking of land and, consequently, is not a proper or legal exer-
cise of the police power. Similarly, the protection through municipal
zoning of particular property with unique characteristics, such as
flood plains, waterfronts, scenic areas, and recreational areas, may
^American Society of Planning Officials (2), pp. 34-35.
**Ellickson(41), p. 711; Lee (58), pp. 299-300; and Witheford
and Kanaan (117), p. 19.
3. 11
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be determined to be unconstitutional takings of private property and,
hence, inappropriate applications of municipal zoning. In these situa-
tions, the appropriate governmental action is the purchase of the prop-
erty through either voluntarily negotiated agreement or, if necessary,
the exercise of eminent domain condemnation. *
Municipal zoning also is occasionally constrained by the require-
ment that any exercise of the police power must be related to the pro-
tection of the health, safety, morals, and general welfare of the people.
While the judicial interpretation of the general welfare is continually
expanding, many land use control techniques which some communities
have attempted to embody within their municipal zoning ordinances,
such as view protection, architectural design control, and the preven-
tion of premature development, have been disallowed by the courts as
unconstitutional takings of property and violations of due process of
law. **
3.1.7 Administrative Problems in Zoning
The procedural limitations which have been discussed in the pre-
ceding sections impose significant constraints upon the manner in which
municipal zoning can control the use of real property. Moreover, the
satisfaction of these procedural constraints is not sufficient to resolve
all of the problems confronting a municipal zoning process. Conse-
quently, in this section, the problems which arise in the administration
of a procedurally sound municipal zoning ordinance are discussed.
3. 1. 7. 1 Information Requirements
The initial establishment of a municipal zoning ordinance requires,
first, the definition of the particular uses which will be permitted either
generally or as special exceptions in each zoning classification; second,
the specification of the height, area, and setback restrictions which will
be applied to each permitted use in each classification; and, third, the
determination of the size and the location of each zoning district to
which each of these zoning classifications will be assigned throughout
the municipality. In addition, if the zoning ordinance contains any per-
formance or design standards, the specification of the precise nature
*American Society of Planning Officials (2), pp. 31-34.
**Ibid. , pp. 48-49.
3. 12
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and value of each of these criteria in each relevant zoning classifica-
tion must be performed. Obviously, the volume of information which
must be collected, processed, and assimilated in the performance of
these tasks is immense.
Moreover, the informational problems confronting the adminis-
trator of the zoning process do not terminate with the adoption of the
zoning ordinance. The enforcement of this ordinance requires the
continual monitoring of the land use activities of all property owners
within the municipality. Once again, these monitoring requirements
are much more stringent for municipalities which incorporate perform-
ance or design standards within their ordinances than they are for
municipalities which rely upon more traditional zoning techniques.*
Finally, each request for a modification of the zoning ordinance
-- a rezoning, a variance, or a special exception -- imposes additional
information requirements upon the zoning process. Changes in the
patterns of supply and demand for particular land uses must be identi-
fied and evaluated; the characteristics of both the property for which
the modification has been proposed and the neighborhood of this prop-
erty must be ascertained; and the implications of approving or denying
the request for modification must be analyzed. To perform these tasks
adequately, information must be obtained which describes present and
prospective future patterns of public and private land uses within the
municipality, adopted plans for future patterns of public and private
land uses, and the attitudes and preferences of the residents of the
community with respect to the proposed modification. This informa-
tion must then be processed and evaluated in arriving at a decision
concerning the approval or denial of the proposal. The difficulty and
complexity of this decision-making process is described in consider-
able detail by Davis and Rueter,** whose analysis clearly indicates the
magnitude of the information requirements confronted by the typical
zoning administrator.
3. 1. 7. 2 Administration by Lay Bodies
The assimilation and evaluation of all of the information described
in the preceding discussion would constitute an extremely difficult task
for a trained zoning practitioner. Yet, the administration of zoning
#Siegan (106), pp. 96, 117-118; and Ellickson (41), p. 707.
**Davis and Rueter (29).
3. 13
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regulations is primarily the responsibility of lay bodies -- city coun-
cils, planning commissions, and boards of zoning appeal -- which, in
general, are not equipped to perform this immense information pro-
cessing task. Moreover, the magnitude and difficulty of this task is
continually increasing as new, more flexible, more technically com-
plex techniques to regulate urban development are devised and imple-
mented. Yet, apparently undaunted by this complexity and convinced
of their competence as decision-makers simply because they live in
the community and eitKer own or rent property, the members of these
lay bodies regularly apply their intuition to the resolution of these com-
plex land use and urban problems. 'Moreover, in arriving at their
decisions, these lay bodies entrust to the political process the specifi-
cation of land use policies which should be determined on the basis of
thorough technical analysis. Obviously, this virtually complete reli-
ance upon the common knowledge of laymen will produce solutions to
land use and urban problems which are inferior to the solutions which
sophisticated technical analysis is capable of attaining.*
3.1.7.3 Lack of Trained Staff
Although the problems associated with the lay administration of
the zoning process could be ameliorated to some extent by the provision
of substantial technical assistance to the members of tho lay bodies,
the provision of this assistance is severely constrained by the unavail-
ability of trained professionals and technicians. The proliferation of
governmental agencies and programs has increased the demand for
skilled planners much more rapidly than the nation's colleges and uni-
versities have expanded the supply of planning professionals. More-
over, only a small portion of the graduates of planning programs choose
land use regulation as a specialty. Instead, the majority of these grad-
uates pursue more popular specialties such as urban design, new town
development, and computer-based research. Finally, although many
of the technical tasks associated with land use regulation do not require
the completion of a graduate program in planning for their performance,
few alternative programs for the development of these technical skills
presently exist.**
^American Society of Planning Officials (2), pp. 38-39.
**Ibid. , pp. 40-41.
3. 14
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3,1.7.4 Conflicts with the Comprehensive Plan
Although the zoning enabling acts of most states require that
zoning regulations must be developed in accordance with a comprehen-
sive plan and despite the judicial criteria which have been established
for the granting of changes in the zoning map, variances, and special
exceptions, municipal zoning processes frequently approve zoning
modifications which are inconsistent with adopted comprehensive plans
and established judicial standards. For example, boards of zoning
appeal have granted variances and special exceptions primarily on the
basis of the benefit which will accrue to the owner of the property for
which the variance or special exception has been requested. Moreover,
these boards occasionally have granted variances which constitute sub-
stantial modifications in the zoning regulations which apply to partic-
ular areas when the boards have concluded that the legislatively estab-
lished restrictions are no longer consistent with the best interests of
the area. Thus, in effect, these administrative boards have been
enacting legislative changes in municipal zoning ordinances despite
their complete absence of any direct accountability to the residents of
the municipality through the voting process.*
Similarly, municipal legislatures also have been known to
approve modifications of the zoning map which are inconsistent with
the stipulations of their own adopted comprehensive plans. Specific-
ally, city councils have permitted the reasoning of single parcels and
small enclaves of land for uses which are different from, and allegedly
incompatible with, the uses which are permitted in adjacent districts.**
3. 1. 7. 5 Contradictions Among Ordinances
The zoning ordinance is not the only governmental instrument
which regulates the use of land in a municipality. The development
and use of real property also is controlled by subdivision regulations,
building codes, health codes, official maps, mapped street ordinances,
and licensing ordinances. Since these various statutes normally are
developed by the staffs of different municipal agencies, it is not
uncommon for the standards which are established in one of these
*This practice of boards of zoning appeal is severely criticized
in Bryden (11), pp. 287-326. Conversely, it has been defended as a
practical approach to introducing flexibility into the zoning process in
Sussna (108), pp. 82-87.
**American Society of Planning Officials (2), pp. 25-29.
3. 15
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statutes to be inconsistent with the standards which are specified in
one., or several, of the other statutes. This lack of coordination
among the staffs of the various agencies unnecessarily complicates the
problems confronting the property owner when he attempts to develop
or vise his property.*
3. 1. 7. 6 Lack of Intra-Governmental Cooperation
The failure of governmental agencies to coordinate their activ-
ities occurs not only when these agencies are formulating policies, but
also when they are applying these policies in specific situations. Boards
of zoning appeal frequently have granted variances which conflict with
the intent of the zoning ordinance, the recommendations of the profes-
sional planning department, and the desires of the city council. Simi-
larly, municipal legislatures themselves occasionally authorize the
construction of public improvements in locations which are inconsis-
tent with adopted land use plans and regulatory ordinances.**
This lack of coordination becomes more pronounced when one or
more of the agencies which are involved in a potential conflict situation
are not formally associated with the zoning process. Thus, the conse-
quences of proposed zoning actions for traffic movement frequently fail
to be recognized by the zoning process merely because this process
does not consult with municipal traffic engineers or traffic planners
either when it establishes zoning standards or when it reviews zoning
proposals. ***
Although inconsistencies of this type could be resolved to some
extent by the requiring of coordination among these agencies by the
rrmnicipal legislature (since the municipal transportation agency and
all of the agencies in the zoning process are directly dependent upon
the municipal legislature for their decision-making authority and their
funding), this method of conflict resolution is ineffectual when the
agency whose policies conflict with zoning regulations have decision-
making authority and sources of revenue which are independent of the
municipal legislature. Consequently, it is necessary to rely on volun-
tary cooperation to resolve conflicts between the municipal zoning pro-
cess and such local, regional, and state agencies as school boards,
*Ibid. , pp. 47-48.
**Ibid. , pp. 54-55.
***Witheford and Kanaan (117), p. 154.
3, 16
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water and sanitation authorities, urban renewal agencies, public hous-
ing authorities, and state highway commissions. The inadequacy of
voluntary cooperation is clearly evidenced by the frequency with which
these independent agencies authorize public improvement projects (i.e. ,
school construction, water and sewer expansion, urban renewal pro-
jects, public housing developments, or highway construction) which
conflict with adopted land use plans and the objectives of the zoning
process. *
A final source of intra-governmental conflict arises between
municipal taxing agencies and the zoning process. The zoning process
may attempt to control the growth of a community by imposing restric-
tive classifications upon particular parcels of land. Unless the public
assessor assesses these parcels of land solely on the basis of their
value in this restrictive use, it is difficult for the administrators of
the zoning process to deny the rezoning of this property to a less
restrictive classification on the grounds that the excessive taxes cause
the more restricted use of the property to be uneconomic. Yet, public
assessors often create precisely this problem by refusing to recognize
the permanence of the restrictive zoning classification; assessing the
property on the basis of a less restrictive, higher valued use; and
thereby subverting the objectives of the zoning process.**
3. 1. 7. 7 Lack of Dialogue Among Participants
The process of municipal zoning embodies a complex unit of legal
precedents and restrictions, planning policies, economic forces, and
political pressures. "Yet, the typical lawyer, planner, developer, and
legislator who is involved in this process makes few attempts to under-
stand the objectives, the assumptions, or the analytical frameworks of
the decision-making procedures which are employed by the other par-
ticipants in this process. This general lack of understanding makes
the establishment of a reasonable dialogue among the various partici-
pants in any zoning action extremely unlikely; and this absence of dia-
logue inevitably generates conflict in many situations in which cooper-
ation or compromise otherwise could have been attained.***
* American Society of Planning Officials (2), pp. 55-57.
**Ibid. , p. 34.
***Babcock (3), p. 100.
3. 17
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3.1.7.8 Unintended Economic Impacts
Inherent in municipal zoning's power to control the use of land is
the power to control the economic return to the owners of land. This
power to influence the distribution of income creates numerous con-
flicts. Thus, the establishment of a zoning classification which makes
a particular use nonconforming not only eliminates the possibility of
any expansion of this use, but also creates for its owner a substantial
degree of local monopoly power based upon the prohibition of the devel-
opment of any competitive use of this type in the immediate vicinity.
Clearly, in arriving at zoning decisions which involve the creation of
nonconforming uses, anti-competitive tendencies of this type should be
considered by the zoning process. *
Similar problems arise when zoning administrators attempt to
plan for commercial expansion. If the zoning process desires to per-
mit the development of only that volume of commercial facilities which
it believes will be economically viable, it is likely that the number of
proposed developments -will exceed the number of developments which
the zoning process desires to permit. Therefore, the zoning adminis-
trators will be required to select the particular developments in the
total group of proposed developments which will be permitted to pro-
ceed. This decision will simultaneously grant economic returns to the
potential developers whose proposals are approved and deny economic
returns to the potential developers whose proposals are rejected. This
undesired consequence constitutes a significant dilemma for the zoning
administrators. However, if these administrators decide to avoid this
dilemma by permitting the development of all proposed commercial
facilities which are compatible with their immediate neighborhoods
and create no substantial traffic problems, they inevitably will be con-
fronted with the problem, of determining the disposition of those facil-
ities which fail to become economically viable.
This conflict between competing economic interests arises in its
most emotional form whenever the zoning process is required to act
upon a proposal for the development of a commercial facility which will
compete with existing commercial uses in the central business district
of the community. Approval of the proposal will deny economic returns
to the owners of the established commercial uses in the central business
district and will accelerate the decline of that district; while rejection
'-American Society of Planning Officials (2), pp. 24-25,
3. 18
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of the proposal will deny economic returns to the owners of the prop-
erty which is proposed for development and will withhold the availabil-
ity of this proposed development from its prospective clientele. The
process of land use regulation is inextricably involved with the redis-
tribution of .income and wealth. *
3. 1. 7. 9 Delays in Response to Changes
in Market Conditions
The pattern of demand for real property is inherently dynamic.
Areas which previously have been appropriate for single-family dwel-
lings become suitable for higher density residential development.
Existing commercial districts decline while other areas become ripe
for commercial development. In the absence of any restrictions upon
the development of real property, these changes in demand patterns
will relatively quickly be transformed into changes in land use patterns.
However, when the establishment of these revised land use patterns is
prohibited by existing zoning regulations, time and resources must be
devoted to obtaining a modification of these regulations. Thus, a real
property market which is constrained by land use regulations will
respond less rapidly to changes in demand patterns than will an unre-
stricted real property market. Moreover, to the extent that a substan-
tial accumulation of unfulfilled demand must exist before the zoning
process will submit to a modification of its regulations, land develop-
ment in zoned communities is likely to follow a pattern of long periods
during which no development occurs interspersed with relatively short
periods of intensive development activity. This phenomenon can create
substantial inefficiency in the land development industry.**
3. 1. 7. 10 Cost of Modifying the Ordinance
Obtaining a modification of the regulations which apply to a par-
ticular property invariably imposes substantial costs upon the owner
of that property. Generally, he will be required to pay an administra-
tive fee when he submits his request for rezoning. Moreover, even
for minor changes in zoning, the property owner must devote consid-
erable time and effort to presenting the details of his proposal inform-
ally to the professional planning staff and formally at a public hearing
before the municipal legislature. In addition, for major zoning changes,
*Babcock (3), pp. 70-73.
**Ellickson (41), p. 696.
3. 19
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". . .large developers often wine and dine local officials, hire expensive
consultants to make presentations at public hearings, initiate large
public relations campaigns, and make judicious campaign contributions
to key local officials. "*
Finally, if all of these efforts fail to induce the desired modifica-
tion of regulations, the property owner may decide to challenge the
municipality's decision in the courts. However, zoning litigation is
expensive. To convey a clear impression of the nature of the neighbor-
hood in which the rezoning is being requested, expertly prepared maps
and detailed photographs must be-presented. Moreover, this demon-
strative evidence must be supported by expert testimony by planners,
appraisers, traffic engineers, and individuals who are knowledgeable
about the particular type of development which is involved in the case.
The fees charged by these experts are substantial. Yet, the value of
the benefit which will accrue to the litigant if the rezoning is approved
is not infinite. Hence, property owners frequently will either decline
to challenge inappropriate local zoning decisions or restrict their
expenditures for zoning litigation to levels which are insufficient to
permit the preparation and presentation of adequate legal actions. The
necessary consequences of decisions of this type is the prohibition of
socially desirable developments and the misallocation cf land uses to
real property. **
3. 1. 7. 11 Improprieties in Zoning Administration
The approval of any proposed modification of zoning regulations
is expected to convey benefits upon the property owners who have
requested this modification and, often, to impose losses upon other
property owners. These expectations of benefits and losses provide
incentives to these property owners to influence zoning administrators
to make decisions which are favorable to their particular interests.
Occasionally, this influence assumes the illegal form of the payment
of graft to these local officials,***
Additional possibilities for impropriety arise when a zoning
administrator has a personal interest in a proposed modification of
*Ibid., p. 698.
**Babcock (3), pp. 93-94.
***American Society of Planning Officials (2), p. 45; and Siegan
(106), p. 98.
3.20
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regulations. Although it appears reasonable to expect any official who
is confronted with a potential conflict of interest of this type to disqual-
ify himself from participating in the resolution of the relevant zoning
action, neither voluntary nor mandatory disqualification is universally
practiced. *
Impropriety may also arise in the pursuit of municipal objectives.
Thus, to reduce public expenditures, a municipality might rezone to a
more restrictive classification a parcel of land which is destined to be
condemned for the development of a public project. This action, which
will reduce both the fair market value of the property and the amount
of compensation which the municipality must pay to the property owner,
rarely will withstand judicial scrutiny if it is detected. *#
Finally, impropriety may result from the arbitrariness and
capriciousness of zoning administrators. The power to influence
municipal zoning decisions incorporates within itself the ability to dis-
pense favors. The exercise of favoritism almost inevitably will pro-
duce an unequal treatment by the zoning process of essentially identical
requests for modifications of regulations.***
3. 1.7. .12 Conflicts Between Municipal
and Regional Goals
The authority to control the use of real property through the
application of municipal zoning procedures generally resides with the
municipal government. Yet, many local zoning actions produce social
and economic impacts which extend beyond the boundaries of the munic-
ipalities which take these actions. Unless these regional impacts are
appropriately considered by the municipal zoning administrators, the
land use pattern which is generated by this localized decision-making
structure is extremely likely to be inefficient. ****
3.1.7.12.1 Border Frictions
In the absence of coordination between the decision-making pro-
cesses of the zoning administrators of adjacent municipalities, the
*American Society of Planning Officials (2), p. 46.
*#Ellickson (41), p. 702.
***Siegan (106), p. 131.
#**#American Society of Planning Officials (2), pp. 7 and 51; and
Geldon (44), p. 386.
3.21
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land uses which are permitted under the regulations which apply to the
property on one side of a municipal boundary may be incompatible with
the land uses which are permitted (and, conceivably, have already been
developed) under the regulations which apply to adjacent property on
the other side of that boundary. This incompatibility may arise either
from the adverse external effects which the former land uses directly
impose upon the latter land uses or from the excessive demands which
the former land uses impose upon public facilities which have been
intended to serve only land use of the latter type. In particular, the
first situation might occur if one municipality permits the development
of light industrial uses which generate noxious odors on property which
is adjacent to an area of high-class, low-density residential develop-
ment in another municipality; while the second situation might be
observed if one municipality permits the development of land uses
which attract large volumes of traffic over streets which have been
designed for only light traffic volumes in an adjacent municipality.*
3. 1. 7. 12. 2 Exclusionary Zoning
In some jurisdictions, municipal zoning is employed as a mecha-
nism to exclude particular socioeconomic groups from establishing
residence. The direct exclusion of racial minorities through the spec-
ification of zoning classifications on the basis of race uniformly has
been overruled by the courts. However, municipal zoning adminis-
trators have successfully produced this desired result indirectly by
enacting zoning regulations which effectively exclude low-income fam-
ilies and individuals from residing in their communities.
The zoning technique which is most frequently asserted to be a
mechanism which has been employed for this purpose is the specifica-
tion of unusually large minimum lot sizes in residential zoning classi-
fications. ** However, an early empirical study sponsored by the
Urban Land Institute has concluded that, if the price per acre of land
does not increase as the required minimum lot size decreases and if
the subdivision regulations relative to public improvements are relaxed
as the density of residential development decreases, the specification
*American Society of Planning Officials (2), pp. 7-8 and 52;
Reps (91), p. 59; and Siegan (106), p. 113.
**See, for example, American Society of Planning Officials (2),
pp. 36-37 and 51-52; Babcock (3), pp. 92-93; Bronstcin and Erickson
(10), pp. 737-747; Ellickson (41), pp. 704-705; Fisher (42), pp. 129-
148; Geldon (44), pp. 380-402; Urban Land Institute ('ill); and Sagalyn
and Sternlieb (96).
3.22
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of large minimum residential lot sizes will not necessarily cause a
substantial increase in the cost of residential construction.* This con-
clusion has been challenged severely by the results of a recent empir-
ical study by Sagalyn and Sternlieb, who present statistical evidence
which demonstrates that the common municipal practice of combining
large minimum floor area specifications, large frontage requirements,
and stringent street and public utility standards with large minimum
residential lot size requirements will produce a substantial increase
in the cost of residential construction.** Moreover, even in the
absence of these complementary restrictions on residential develop-
ment, the requirement of large minimum lot sizes reduces the total
number of dwelling units which can be constructed in the municipality.
If the demand for housing is unaffected by this regulation, this restric-
tion of the potential supply of residences will increase both the market
price of a residence and, consequently, the market price per acre of
undeveloped land.***
It is also claimed that the exclusion of potential low-income resi-
dents has been effectively performed through the municipal prohibition
of multiple-family residential developments and mobile homes**** and
through the forbiddance of the establishment of industrial uses which
might provide employment for low-income workers.***** Although al.l
of these zoning techniques have been challenged in the courts on the
basis of both their inconsistency with the general welfare and their
unconstitutionality, the courts generally have been reluctant to sustain
these challenges and, thereby, to deny the validity of municipal legis-
lative actions -- despite the social desirability and potential economic
efficiency of providing housing and employment for low-income groups
somewhere in the region or, at least, the nation.
3.1.7.12.3 Fiscal Zoning
Municipal zoning administrators frequently sacrifice the attain-
ment of the best pattern of land uses for the future in an attempt to
improve the financial position of the municipality in the present. Some
*Urban Land Institute (111).
**Sagalyn and Sternlieb (96), pp. 64-70.
***Geldon (44), p. 392.
****Ellickson (41), p. 704; and Fisher (42), p. 130.
*****American Society of Planning Officials (2), p. 37; and Babcock
(3), pp. 56-57.
3.23
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of these fiscal zoning actions are intended to increase municipal rev-
enues; while others are designed to avoid or, at least, to reduce incre-
mental public expenditures. Thus, a municipality might assign indus-
trial or commercial zoning classifications to excessively large areas
of land in an attempt to attract developments which will improve the
tax base and increase employment in the community,* Conversely, it
might establish large minimum residential lot sizes, limit or prohibit
the development of multiple-family dwellings, restrict or forbid mobile
homes, and specify excessively high zoning, subdivision regulation,
and building code standards in order to impede the provision of low-
cost or moderate-cost housing which increases municipal expenditures
(especially educational expenditures) more than it increases municipal
tax revenues. Clearly, the adoption of either of these measures, if
successful, will reduce the tax burden of the existing residents of the
municipality below the level which it will attain if the action is not
taken and, consequently, may avert a politically undesirable tax
increase. However, these policies also will impose increased tax
burdens upon those other municipalities in which these industrial and
commercial developments otherwise would have been located or in
which the low-income and moderate-income families and individuals
will now be forced to reside. Zoning actions which are locally desir-
able may be regionally inefficient.**
3.1.7. 12. 4 Regional Resource Utilization Patterns
The actions taken by the zoning administrators of one municipal-
ity may have severe impacts upon the availability and utility of certain
resources to other communities within the region. The permission of
particular industrial uses which provide substantial employment in one
municipality may generate serious air pollution or water pollution prob-
lems in neighboring jurisdictions. The prohibition of sand and gravel
mining by a local legislature may severely restrict the availability and
substantially increase the cost of these resources in nearby commun-
ities. Conversely, the improper control of the restoration of quarries
and pits by one municipality may cause significant problems of environ-
mental degradation in adjacent jurisdictions. ***
*American Society of Planning Officials (Z), p, 35; Gillespie (46),
p. 728; and Siegan (106), p. 140.
**American Society of Planning Officials (2), p. 69.
***Ibid. , pp. 8-9 and 52.
3,24
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Although all of these inter-governmental conflicts might be elim-
inated or, at least, ameliorated to some extent by the assignment of
authority for the regulation of the use of real property to regional gov-
ernments or agencies, this centralization of decision-making will sub-
stantially increase the intensity of many other administrative problems
and will decrease the extent to which the zoning process permits self-
determination of the resolution of land use problems by the people who
are most directly affected by these problems. A choice must be made
between the internalization of regional conflicts and the efficiencies of
decentralized decision-making. *
3.1.8 Political Problems in Zoning
Theoretically, municipal zoning constitutes a coherent, consis-
tent, and accessible system of comprehensible and practical regula-
tions of the use of real property which are applied impartially to a
community as a whole. However, this mechanism for reconciling
competing claims to the use of land necessarily -- and rationally --
has been entrusted to the political process for its administration.
This assignment of administrative authority inevitably makes the
zoning process susceptible to a variety of competing political pres-
sures.
3.1.8.1 Interest G roup Influences
The adoption of a new zoning ordinance, the amendment of an
existing zoning ordinance, or even the implementation of established
zoning regulations will provide benefits to some individuals and will
impose costs upon others. Recognizing this fact, individuals whose
interests potentially will be affected by a particular zoning action will
be motivated to form interest groups in an attempt to influence the
decision which eventually will be made by the administrators of the
zoning process. However, the likelihood that these motivations will
be sufficient to produce the formation of an effective interest group is
dependent upon the intensity and the dispersion of the interests which
might be affected by the particular zoning action. Thus, a small
number of strongly interested persons is much more likely to organize
an effective interest group than is a large number of moderately inter-
ested persons in any particular situation -- despite the possibility that
the total impact of the proposed zoning action upon the individuals who
*Ibid. , p. 9; Geldon (44), pp. 394-395; and Reps (91), pp. 59
and 63.
3.25
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fail to organize effectively may be substantially greater than the total
impact of this action upon the individuals who have succeeded in coales-
cing their interests.
To the extent that the political process recognizes and responds
more favorably to organized interest groups than it does to amorphous,
unenunciated interests, this bias in the pattern of interest group forma-
tion will produce a lack of impartiality in the zoning process and
inefficiency in the allocation of activities to land. This phenomenon
provides a convincing explanation for the intense activity and substan-
tial effectiveness of local interes-t groups in inducing zoning actions
which promote their parochial interests at the expense of the more
dispersed interests of the community as a whole. *
In addition, the complexity of the typical municipal zoning pro-
cess places a strong emphasis upon technical and political expertise.
Thus, an interest group whose leaders are knowledgeable about the
intricacies of the administrative structure of the zoning process and
aware of the political commitmeats of the zoning administrators and
municipal legislators is more likely to obtain favorable zoning actions
than is an interest group whose leaders lack these qualifications.**
Although the compromise decisions which emerge from a process
which effectively excludes unorganized, politically ignorant, or polit-
ically unskilled groups may be entirely satisfactory and appropriate to
the legislative procedures of a representative society, they may be
unacceptably inefficient as standards for the control of real propety. ***
3. 1.8.2 Political Favoritism
An individual who is personally acquainted with and has access to
the decision-makers within the zoning process can obtain both valuable
technical assistance in the preparation of his appeals to that process
and, in some cases, direct favors from the administrators of that pro-
cess. This accessibility provides this individual with a substantial
comparative advantage in obtaining desired zoning actions. Clearly,
this political favoritism, is not necessarily consistent with the attain-
ment of efficiency in the regulation of the use of land. ****
#Makielski (65), p. 19; and Siegan (106), p. 138.
**Makielski (64), and Makielski (65), pp. 17-18.
***Siegan (106), p. 132.
****Siegan (106), p. 131.
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3.1,8.3 Implications of Majority Rule
If the elected officials who participate in the administration of
the municipal zoning process desire to retain their positions, their
actions must please at least a simple majority of their constituency.
Therefore, a rational political decision-maker will only support those
zoning actions which will increase the number of votes which he will
receive in his next election campaign. As a consequence of this polit-
ical incentive, a democratic political process occasionally may impose
zoning regulations which are overly protective of existing land uses
and, hence, impede the transition of the real property market toward
more efficient land use configurations.*
In addition, if a particular group of individuals consistently sup-
port the minority position in zoning actions, the democratic political
process may systematically generate zoning decisions which are con-
trary to the interests of these individuals. Unless personal prefer-
ences are sufficiently diverse to permit shifting coalitions to organize
in support of different zoning proposals, there is no reasonable assur-
ance that the zoning process will at some time provide benefits to each
member of the community.**
3. 1. 8. 4 Political Delay
The complexity of the typical municipal zoning process presents
numerous opportunities for zoning administrators to delay the process-
ing of any particular zoning action. Moreover, any delay which is
introduced into the processing of a zoning proposal is likely to impose
substantial costs upon the developer who has initiated the proposal.
Consequently, municipal decision-makers are frequently alleged to
employ these opportunities for delay to induce developers to agree to
restrictions upon their right to develop their property, such as the
compulsory dedication of property for schools and parks or the execu-
tion of a covenant constraining the possible future use of the property.
Although many of these restrictions will be invalidated by the courts
if they are challenged, the high cost of zoning litigation and the reali-
zation that the municipality can introduce further delays into the devel-
opment of the property at subsequent stages of the regulatory process
(e.g., building permit approval, health code inspection, occupancy
*Davis (27).
#*Geldon (44), p. 385.
3.27
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permit approval, etc.) generally discourages developers from exer-
cising their right to request judicial review. *
3. 1,9 Economic Problems in Zoning
The primary economic justification which has been advanced for
the imposition of municipal zoning restrictions upon real property
markets is the allegation that there exists between various types of
land uses certain uncompensated external economic effects which pre-
vent the unrestricted market from functioning in a manner which is
consistent with the attainment of economic efficiency. Therefore, it
is asserted that the political process must intervene in this market to
protect property owners against the potential erosion of their wealth.
Moreover, it has been demonstrated that, within the context of a static
analysis, a market mechanism which is perfectly regulated according
to the basic zoning strategy is capable of attaining economic efficiency,
In addition, with relatively obvious restatements of initial conditions,
this analysis can be extended to demonstrate the potential economic
efficiency of municipal zoning in a dynamic context, **
3, 1.9. 1 The Empirical Validity of Zoning
Several recent studies*** have empirically investigated the theo-
retical economic justification for zoning by attempting to isolate sys-
tematic statistical relationships between the market values of residen-
tial properties and the characteristics of the neighborhood surrounding
these properties. Uniformly, these studies have failed to isolate
empirically the external effects which the relevant zoning ordinance
implies should exist. Consequently, on the basis of the presently
available evidence, it appears doubtful that the traditional economic
rationale for the adoption of municipal zoning regulations is justifiable.
In addition, one of these studies has also investigated the rela-
tionship between the zoning classifications which have been assigned
to various residential properties and the market prices of those prop-
erties.**** This investigation has concluded that the existing assign-
ment of zoning classifications to residential properties has not had any
statistically significant effect upon the market prices of the properties.
*Babcock (3), pp. 53-54 and 90.
**Davis and Whinston (30).
***Crecine, Davis, and Jackson (21); Maser, Riker, and Rosett
(67); and Rueter (95),
*#**Maser, Riker, and Rosett (67),
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That is, there is no evidence that zoning, as it actually is applied,
restricts the quantity of land which can be devoted to any particular
use sufficiently to cause this type of land to become relatively scarce
and, hence, to elevate its market value. If this conclusion is gener-
ally valid, it raises serious questions about the potential effectiveness
of municipal zoning as a land use control technique.
3. 1. 9. 2 Inefficiency of Mandatory Controls
The compliance of property owners with zoning regulations is
mandatory. Potential violators of these regulations are denied build-
ing permits or occupancy permits; while existing violators may be
forced to comply with the stipulations of the zoning ordinance through
the issuance of mandatory injunctions. This reliance upon mandatory
compliance as an enforcement mechanism might promote economic
efficiency in the regulation of the use of land if there is reasonable
certainty that the restrictions which are specified in the current zoning
ordinance are precisely those restrictions which will optimally control
the interdependencies which exist in the real property market. How-
ever, the previously discussed administrative inefficiencies, political
influences, judicial constraints, and economic problems inherent in
the management of the zoning process strongly surest that this situa-
tion generally will not prevail. Rather, it appears likely that the
zoning regulations which have been established in any typical munici-
pality will generate, or at least will fail to ameliorate, numerous
economic inefficiencies in the market for land.
Under these circumstances, insistence upon mandatory compli-
ance with zoning regulations is tantamount to requiring the continuation
of these economic inefficiencies. It appears preferable to attempt to
develop an enforcement mechanism for the zoning ordinance which will
encourage deviations from strict compliance with the provisions of this
ordinance if these provisions are inconsistent with the attainment of
economic efficiency. For example, this objective might be success-
fully promoted if the penalty for violating the provisions of the zoning
ordinance were limited to the payment of a fine or an award for
damages which approximates the nuisance costs which result from the
lack of compliance. Thus, if the value to a property owner of violation
of an inefficient zoning regulation exceeds the amount of this fine, the
property owner can choose to violate this regulation, pay the fine, and
increase the economic efficiency of the real property market.*
*Ellickson (41), pp. 706-708.
3.29
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3.1.9.3 The Desirability of Compensation
The enactment of a zoning regulation which prohibits the estab-
lishment of a land use for which there is an effective demand upon a
particular site will adversely affect the value of that site. Similarly,
the approval of a modification of the zoning ordinance which will permit
the development of a land use on one property which will generate
adverse economic effects for neighboring properties will reduce the
market values of these neighboring properties. However, in general,
the courts do not require the payment of compensation to those prop-
erty owners who suffer a decrease in their wealth as a result of these
exercises of the police power. Yet, the absence of a judicial require-
ment of the payment of compensation to property owners whose wealth
is adverseJy affected by the implementation of the zoning ordinance
docs not necessarily imply that this payment of compensation is so-
cially or economically undesirable. Rather, it is conceivable that the
payment of compensation will promote the attainment of valid social
objectives by ameliorating inequities which arise from the impact of
the enactment of zoning regulations upon the prevailing distribution of
wealth.* Moreover, it is possible that the payment of compensation
will induce greater economic efficiency in the regulation of the use of
real property by causing the administrators of the zoning process to
recognize the costs which are imposed upon individual property owners
when particular zoning restrictions are imposed upon their properties.*
Obviously, these potential benefits which might arise from the payment
of compensation must be compared with the costs of estabJishing and
administering a compensation system, in determining the overall social
and economic desirability of adopting this policy.
3. 1. 9. 4 The Consequences of Non-Zoning
Perhaps the strongest indication that municipal zoning is not uni-
versally necessary as a mechanism for the regulation of the use of land
is provided by the experience of Houston, Texas -- the only major city
in the United States which has not adopted a comprehensive zoning pro-
cedure. Interdependences between private land uses are controlled in
Houston by voluntarily negotiated deed restrictions and private cove-
nants, which are legally binding for a specified period of time and usu-
ally are automatically renewed unless they are modified by a majority
of the property owners who have been bound by the restrictions.
^Davidson (26), p. 44; Penny (84), pp. 261-266; and Reps (91),
p. 63.
**Davidson (26), pp. 47-48.
3. 30
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The pattern of land uses in Houston is virtually indistinguishable
from the land use configuration of most major zoned cities. Economic
forces produce a natural separation of land uses. The rate of appreci-
ation of the values of residential properties in Houston appears to be
equivalent to the appreciation rate of these values in other cities. In
fact, the only minor differences which have been observed are a greater
availability of multiple-family residential developments and lower
apartment rents, a greater intensity of commercial development adja-
cent to major thoroughfares, and a higher incidence of non-residential
land uses in residential neighborhoods in Houston relative to other
cities. *
Thus, to the extent that similar patterns of development might
have evolved in other municipalities in the absence of the imposition
of any zoning regulations, the enactment and implementation of zoning
processes may have been, at best, superfluous and, at worst, extremely
wasteful of society's scarce resources. Yet, it is important to recog-
nize that Houston's pattern of development undoubtedly has been influ-
enced by its location on a flat plain which imposes no geographical
limitations upon its expansion.** Consequently, it is possible that
voluntarily negotiated restrictive covenants will constitute inadequate
land use control mechanisms in municipalities exhibiting topographic
conditions which differ substantially from those of Houston.
3.2 Eminent Domain
3.2. 1 The Nature of Eminent Domain***
Eminent domain is the right of public authority to appropriate
private property with or without the consent of the owner of the prop-
erty. This sovereign right is possessed by both the Federal govern-
ment and the individual state governments, although the Federal pre-
rogative takes precedence over the state prerogative when both
governments attempt to exercise the power of eminent domain over
the same property at the same time. Moreover, although the right to
*Geldon (44), pp. 399-400, and Siegan (106), pp. 75-129.
**Geldon (44), p. 400.
***The material presented in this section has been abstracted from
Edens (40), pp. 314-316, and Lawrence (57), pp. 1-8.
3.31
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initiate eminent domain proceedings formally resides only with the
Congress or the state legislatures, this right can be -- and frequently
is -- delegated to administrative agencies, which may include munici-
palities, public corporations, private corporations, and private indi-
viduals. This delegation of power generally is motivated by the com-
plexity of the process of acquiring property and must be based upon
public necessity. The rights which are granted may be restricted by
any qualifications which the delegating legislature considers to be
appropriate.
The only substantive limitations which are imposed upon the exer-
cise of the right of eminent domain at the Federal level are embodied
in the provisions of the fifth amendment to the Constitution, which
declares: ". . . nor shall private property be taken for public use with-
out just compensation. " Thus, before any authorized agency can exer-
cise its right of eminent domain, the Constitution requires that this
agency must demonstrate both that the property which it is acquiring
will be devoted to a public use and that just compensation has been paid
for the property. Moreover, the constitutions of approximately half of
the states also require the payment of compensation when private prop-
erty is damaged, but not taken, by an action of an authorized agency.
In addition to these substantive limitations, certain procedural
restrictions are imposed upon the exercise of the power of eminent
domain by the constitutional requirement of due process of law. In
particular, the courts have broadly interpreted this requirement as an
obligation upon them to guarantee that the purpose of the acquisition of
private property is the provision of a public use, that the compensation
which has been offered for this property is adequate, that any delega-
tion of the power of eminent domain is valid, that the individual who
owns the property which is being acquired has received appropriate
notice prior to the taking, and that this property owner has been given
an opportunity to be heard before a lawful public tribunal which employs
procedures which do not violate his fundamental human rights.
The specific processes which have been developed by the Federal
government and the various state governments to satisfy these proce-
dural restrictions are determined by the statutory laws of these juris-
dictions and, consequently, differ among jurisdictions. Nevertheless,
these eminent domain processes can be classified roughly into two
mutually exclusive categories: those processes which acquire property
through the issuance of administrative orders and those processes
which acquire property through the proclamation of judicial decrees.
3.32
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The essential practical distinction between these two types of
processes consists in the relative timing which they apply to the acqui-
sition of possession of the property and the adjudication of the terms
of this acquisition. In administrative processes, possession precedes
adjudication. Thus, upon the satisfaction of certain specified condi-
tions, the agency which desires to condemn a particular property can
acquire title to that property. Only after this action has been completed
is the previous owner of the condemned property permitted to challenge
either the validity of the condemnation of his property or the adequacy
of the compensation which has been offered for this property. Con-
versely, in judicial processes, adjudication before a trial court pre-
cedes the condemnation of any property. However, the agency which
has initiated the eminent domain proceeding is permitted to acquire
title to the property immediately upon the issuance of an order of con-
demnation by the trial court and, hence, prior to the conclusion of any
appellate proceedings before tribunals other than the trial court.
3.2.2 The Public Use Concept
The legal justification for every exercise of the right of eminent.
domain is that property which is acquired will be employed for a public
use. Consequently, the primary legal objection which can he raised to
challenge any particular application of the power of eminent domain is
that the proposed utilization of the condemned property does not consti-
tute a public use. The difficulty which confronts the courts when they
are asked to adjudicate an objection of this type is the interpretation of
the concept of public use.
There are two basic judicial interpretations of this concept. The
narrow interpretation maintains that a public use exists only when the
public is entitled by right to use or to enjoy the use of the property
which has been condemned; while the broad interpretation declares that
the condemnation and subsequent use of a property is merely required
to promote the public benefit or common good to a perceptible degree
in order to be considered a public use.* Initially, the more restrictive
narrow interpretation of the concept of public use predominated in the
courts of this country and, consequently, the application of the right of
eminent domain was severely constrained. However, in more recent
years, the judicial interpretation of this concept has been broadening
*Boyce (8), pp. 299-300; Lawrence (57), p. 8; and MacAffer (63),
57.
3.33
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to the extent that the government now is permitted to condemn property
for purposes which previously have been prohibited. In particular,
broader exercise of the public power of eminent domain has been
allowed in the acquisition of property for purposes of urban renewal,
conservation of natural resources, and the preservation of open space.*
Moreover, its application has been permitted in forms other than the
acquisition of property in fee simple, such as condemnation and subse-
quent leasing of property to private individuals, temporary acquisition
and ensuing resale of property to private individuals subject to the pro-
visions of a development plan, procurement of development rights or
easements, and acquisition of access rights to property.** However,
there are still several areas in which the1 application of the power of
eminent domain might be socially desirable, but relative to which
courts have not established clear precedents.
,3.2.2. 1 Excess Acquisition
Excess acquisition constitutes acquisition through the exercise
of the right of eminent domain of more property than is actually neces-
sary for the physical development of a public improvement. Thus, this
acquisition is incidental to the provision of the public improvement by
the condemning agency, Yet. it is undertaken by this agency for the
purpose of holding, selling, leasing, or exchanging the "excess" prop-
erty in promotion of the public interest. Three distinct alternative
justifications for this application of the right of eminent domain have
been advanced.
First, it is asserted that the acquisition of precisely that prop-
erty which is required for the development of a particular public
improvement frequently will result in the creation of remnant parcels
of land which are inappropriate for any reasonable use. The acquisi-
tion of these remnants by the public authority provides an opportunity
to replot them into usable parcels which can subsequently be resold.
The courts have generally accepted this justification for excess acqui-
sition whenever it has been applicable.
Second, it is argued that the inappropriate development of prop-
erty adjacent to a public improvement can adversely affect the effi-
ciency with which this public improvement can be used. Consequently,
*Boyce (8), pp. 300-301.
#*Witheford and Kanaan (117), p. 11.
3. 34
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it is proposed that the right of eminent domain should be exercised to
acquire this adjacent property, which can subsequently be sold or
leased subject to restrictions which will protect the public improve-
ment from adverse external effects. The receptivity of the courts to
this potential justification of excess acquisition has been mixed. In
some instances, the courts have objected to the right of the public
authority to sell the excess property which it has acquired. Yet, the
courts have also permitted the use of excess acquisition for aesthetic
purposes in several past decisions.
Finally, it is contended that, since the development of public
improvements may increase the value of adjacent properties, the
excess acquisition and subsequent resale of these adjacent properties
should be pursued to obtain for the public authority this incremental
value and, hence, to recoup some of the costs of providing the public
improvement. The courts generally have rejected this potential justi-
fication of excess acquisition whenever it has been challenged. How-
ever, the recent use of excess acquisition solely for recoupment pur-
poses on TVA projects has not yet been challenged and, hence, is
evidently being tolerated by the public.*
3.2.2.2 Advance Acquisition
Improved urban land normally is developed with extremely dur-
able and expensive capital improvements which determine the char-
acter of the services which will be rendered by this land for extensive
periods of time. The substantial expense associated with the modifica-
tion of these improvements by demolition or conversion introduces a.
significant element of irreversibility into the process by which uses
are allocated to parcels of urban land. This irreversibility would
have few implications for the public regulation of the use of urban land
if it were not true that particular sites offer very specific locational
advantages for certain public facilities. However, since the efficiency
of some public facilities is not independent of the location of these facil-
ities, it may be desirable for the government to acquire particular
parcels of land in advance of the formulation of any specific plans for
the development of these parcels in order to preserve these sites from
premature private development in other, less valuable uses.
Admittedly, the prospect of premature private development exists
for both properties which are especially appropriate for certain public
*Boyce (8), pp. 294-295 and 301.
3.35
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uses and for properties which are particularly suitable for specific
private uses. However, this prospect is substantially greater for
land which is uniquely qualified for the development of a public facility
because the manner in which the government's power of eminent
domain determines the value of a parcel of land effectively discourages
property owners from refraining from developing in private uses prop-
erties which they recognize will eventually have higher values in public
use. Specifically, the compensation which is paid when a parcel of
land is condemned by the government is set equal to the fair market
value which that parcel can be expected to attain as a result of compe-
tition among private land users. Since the property owner is offered
no opportunity to obtain any of the incremental value which his prop-
erty will earn when it is developed in a public use, he has no incentive
to take this incremental value into account in his decision to develop
this property. Consequently, he will rationally choose to develop his
property in a private use -- and, hence, to earn short-term returns
from this use -- despite his recognition that his adoption of this
strategy will impose incremental demolition or conversion costs upon
the government when his property eventually is condemned.
Acknowledging this tendency of urban property markets to pro-
mote intertemporal inefficiency in the allocation of usec of land, the
desirability of permitting the government to purchase private property
in voluntary market transactions in advance of specific plans for the
use of this property becomes obvious.* Moreover, to the extent that
the compensation costs associated with the exercise of the right of
eminent domain are substantially lower when private property is
acquired prior to its development for a private use than when it is
acquired after this development, the application of the right of eminent
domain to the advance acquisition of property also appears to be desir-
able.
3.2.2.3 Inverse Condemnation and
Environmental Pollution
Air and water pollution generate external effects which may sig-
nificantly decrease the market values of adversely affected properties.
Yet, unless the owners of these properties can identify the sources of
this pollution, eliminate all alternative causes of the reduction in prop-
erty values, substantiate the magnitude of this reduction, and apportion
*Shoup (105), pp. 147-205.
3.36
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this magnitude among the various sources of pollution, it will be impos-
sible for these property owners to recover damages through private
legal actions alleging nuisance, ultrahazardous liability, or negligence.
Moreover-, when the source of the pollution is a public activity, private
legal actions are totally precluded by the traditional immunity of gov-
ernment from suits in tort. In situations like these, inverse condem-
nation actions may represent desirable mechanisms to provide compen-
sation for the adverse external effects which are generated by environ-
mental pollution.
As the title suggests, inverse condemnation actions constitute
inversions of ordinary condemnation actions. With ordinary condem-
nation, the authorized condemning authority initiates a proceeding
which requests the condemnation of a particular property for a public
use and asks the trial court to determine the just compensation which
should be paid for that property. Conversely, with inverse condemna-
tion, the owner of a particular property files a complaint against an
authorized condemning authority which alleges that this authority has,
in fact, appropriated or damaged his property without paying him the
just compensation to which he is entitled, *
However, the courts generally have ruled that, before any reduc-
tion in the market value of private property which has been caused by
the generation of environmental pollution by a public facility will con-
stitute the basis of a successful inverse condemnation action, it must
be demonstrated that these adverse external effects were foreseeable
and that the environmental pollution which causes these effects directly
encroaches upon the private property. Similarly, before a successful
inverse condemnation action can be based upon the reduction of private
property values which is caused by the pollution generation activities
of a group of private sources which is so large that it is impossible to
apportion the responsibility for this pollution among the individual
sources, the courts must rule either that the state government has an
affirmative duty to abate environmental pollution or that the state, by
chartering a corporation or licensing a business whose operations
cause adverse external effects which constitute an appropriation of
private property, has effectively delegated to that corporation or busi-
ness the power of eminent domain. Thus, in the absence of favorable
court rulings in the future, inverse condemnation will fail to constitute
an effective mechanism for the amelioration of many of the adverse
*Lindas (62), p. 125.
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effects of environmental pollution despite its potential desirability for
this purpose.*
3. 2. 3 The Concept of Just Compensation
The fifth amendment of the Constitution requires that the owner
of any property which is appropriated through the exercise of the right
of eminent domain mus^t receive just compensation for this property.
The objective of this requirement is to provide to the property owner
precisely that amount of income which will place him in the same posi-
tion which he would have occupied if his property had not been con-
demned. In attempting to attain this objective, the courts have been
confronted with the problem of establishing standards for the determi-
nation of this amount of income.
Correctly, the courts have rejected the value which is attached
to the property by the condemning agency as the appropriate standard.
This value constitutes the amount of income which must be surrendered
by the condemning agency to place that agency in the same position
which it would have occupied if it had not appropriated the property.
Clearly, if the condemnation of the property promotes economic effi-
ciency, this valuation generally will, exceed the amount of income which
the courts desire to ascertain.
Somewhat less justifiably, the courts also have rejected the value
which is attached to the properly by its previous owner as an appropriate
standard for the determination of just compensation. Admittedly, the
direct acceptance of this value as the amount of income which should be
paid to the owner of condemned property will usually result in the pay-
ment of excessive compensation to that individual because this value
fails to account for the existence of any substitutes for the property
which has been condemned. However, this value does provide a con-
siderable amount of valuable information about the personal loss which
the property owner sustains when condemnation occurs. Hence, it
appears desirable to include this value as one indicator of the appro-
priate magnitude of adequate compensation.
Yet, instead of employing either of these value measures in their
determination of just compensation, the courts have chosen to rely
exclusively upon the value for which the property might be expected to
be exchanged in the market as their appraisal standard. Conceptually,
*Kramon (55).
3.38
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this value represents the price which will be voluntarily negotiated for
this property by a hypothetical seller who is willing but not obligated
to sell and a hypothetical buyer who is willing but not obligated to buy.*
Although this amount of compensation will be sufficient to place the
property owner in the same position which he would have occupied if
his property had not been condemned _if_all property owners have equal
access to the mortgage market, j_f there are other properties which
are considered by the property owner to be perfectly equivalent to the
condemned property and are available to him at a price equal to the
amount of compensation, and if there are no costs associated with
relocating from, the condemned property to any other property, these
conditions generally will not be satisfied in any realistic situation.
Consequently, the judicial standard for the determination of just com-
pensation will systematically award compensation which is inadequate
to return the property owner to the position which he occupied prior to
the condemnation of his property. In effect, application of this judicial
standard causes the property owner to be compensated only for the
value of the property which has been appropriated and, hence, fails to
compensate him adequately for all of the damages which the appropri-
ation of his property has imposed upon him, **
3.2.3.1 Highest and Best Use
Fortunately, in implementing this judicial standard, the courts
have adopted the general principle that a proposed land use which is
higher and better (i. e. , capable of earning a greater return for the
property owner) than the presently existing land use constitutes a legit-
imate basis for estimation of the value of the property, provided that
the proposed use is not excessively remote or speculative. Since the
market value of a parcel of land is determined not only by the returns
which arc earned by its present use, but also by the returns which are
expected to be earned by its potential future uses, it clearly would be
inappropriate to estimate the amount of compensation which should be
paid for a property solely on the basis of the value which this property
would possess if it were retained in its present use perpetually.
Yet, the necessity of considering the potential future use of a
property imposes several obvious problems upon the courts. In par-
ticular, in evaluating any particular property, not only must the courts
*Klein (54), p. 9; Lawrence (57), pp. 16-18; and Sengstock and
McAuliffe (104), pp. 190-191,
**Klein (54), p. 10.
3. 39
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forecast the expected future market demands for the use of this prop-
erty, they also must analyze the existing legal constraints upon the
initiation of these potential future uses and predict the possibility of
future legislative or judicial relaxation of these constraints. Thus,
the essential consideration of the potential future use of a property
unavoidably introduces undesirable elements of subjectivity, inconsis-
tency, and error into the determination of just compensation.* More-
over, even if these practical problems can be successfully managed,
the established judicial standard remains inadequate as a mechanism
to compensate property owners for all damages which are imposed
upon them by the condemnation of their property.
3.2.3.2 Displacement Costs
The exercise of the right of eminent domain to appropriate a
particular property may impose direct costs upon the owner of this
property which will not be reflected in the objectively determined
market value of the property. First, the transferring of legal title to
the property to the state may cause the owner to incur several miscel-
laneous costs, such as recording fees, title transfer taxes, penalties
for the prepayment of a mortgage, and loss of prepaid property taxes.
Historically, the property owner has been unable to recover these
costs from the condemning agency, although some recent legislation,
such as the Federal Aid Highway Act of 1968, provides for their coin-
pen sation. **
Second, because the judicial standard for the determination of
just compensation estimates the value of a property on the basis of a
hypothetical exchange between an average buyer and an average seller,
it fails to recognize any special circumstances which might be associ-
ated with the manner in which the owner of the property which is being
condemned has originally purchased this property. This failure to
recognize special circumstances may impose substantial displacement
costs upon some property owners. In particular, low-income buyers
who can afford to pay only very low down payments generally are con-
sidered to be poor credit risks and, consequently, are required to pay
inflated prices for property. When a property which has been purchased
at an inflated price is condemned, the owner of this property frequently
loses any equity which he has established and may be required to pay a
*Berger (5), pp. 87-91.
##Bosselman, Newsom, and Weaver (7), pp. 9 and 11.
3.40
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deficiency judgment in addition to this compensation award in order to
settle his remaining indebtedness on the property. Despite a recent
court ruling that the holders of mortgages on property are entitled only
to payment of the realistic present value of their rights to future pay-
ments discounted at a rate which appropriately accounts for the credit
risk,* few courts apply this alternative valuation approach. Asa
result, exercise of the right of eminent domain may cause many prop-
erty owners to lose equity which they have acquired in property which
is condemned.**
Finally, since plans to develop public improvements usually are
announced substantially earlier than property is condemned for the
development of these improvements and since in most states the date
for which fair market value is determined is the date on which the con-
demning agency initiates court action to appropriate the property, the
owner of condemned property may suffer losses as a result of the delay
between the announcement of a project and the acquisition of his prop-
erty. Specifically, he is likely to be damaged if, for personal reasons,
he is required to dispose of his property at a depressed price before it
is condemned. Similarly, if his property is income property, he may
lose rental income if any of the leases on this property expire prior to
the date of condemnation. Finally, since the knowledge of the impend-
ing public project will both encourage emigration from the neighborhood
and encourage the deterioration of the properties in the neighborhood,
market value of any property in this area is likely to decline during the
•period between announcement of the project and the appropriation of the
property. Since the compensation which is paid for a property is deter-
mined at the date of acquisition of the property, all of this decrease in
market value will be borne by the private property owner. Moreover,
under either current eminent domain or supplementary legislation,
none of these losses can be recovered from the condemning agency by
the property owner.***
3.2.3.3 Relocation Costs
The relocation of a family or business may require a substantial
expenditure of time and resources and, hence, may impose substantial
*Mayme Riley vs. District of Columbia Redevelopment Land
Authority, 246 F.2d 641 (D.C. Cir. 1957).
**Bosselman, Newsom, and Weaver (7), pp. 9 and 11; and Dagen
and Cox (24).
#**Bosselman, Newsom, and Weaver (7), pp. 9-11.
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costs upon the family or business which is forced to relocate. These
costs include the cost of searching for replacement facilities; the
transportation, food, and lodging costs incurred while performing the
actual movement; and any incidental costs of acquiring replacement
facilities, such as costs of appraisal, survey, title examination, and
closing for purchasers of property or security deposits for utility ser-
vice or advance payment of rent for renters. In addition, some fami-
lies may incur certain indirect costs, such as the loss of support from
family members who live near to their previous residence; while busi-
nesses may suffer a loss of business or goodwill which will perma-
nently affect the profitability and value of their enterprise. Moreover,
some businesses, primarily small, marginal retail establishments or
firms with special licensing or zoning requirements, may fail to relo-
cate sxiccessfully and, hence, may cease to exist. Finally, both fami-
lies and businesses often discover that the cost of equivalent replace-
ment facilities exceeds the compensation which they have received for
their condemned property. This situation is especially likely to arise
when the public project for which their property has been appropriated
has significantly reduced the total supply of facilities at a particular
price level.
Traditional notions of just compensation do net provide for the
recovery of any of these relocation costs, although some supplementary
legislation does authorize the payment of compensation for actual
moving costs and for the increased cost of replacement facilities.
However, even this legislation permits the payment of compensation
only to those families, businesses, and individuals who relocate after
their property has been appropriated. Thus, those who move after the
announcement of a project but prior to condemnation of their property
are required to pay all of their relocation expenses.*
3.2.3.4 Employment Costs
A resident who is displaced by an exercise of the right of eminent
domain may be unable to locate a new residence which is as near as
his previous residence to his place of employment. If this occurs, he
will be required to pay increased commuting costs to reach his place
of employment. In fact, if the location of his new residence makes it
impossible for him to reach his place of employment, he may actually
'•-Bosselman, Newsom, and Weaver (7), pp. 9-11; and Millspaugh
(74), pp. 13, 18-20, and 25.
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suffer a loss of employment as a result of his relocation. Similarly,
if his place of employment has also been condemned and has failed to
relocate, .loss of employment will result. Neither current eminent
domain law nor supplementary legislation provides for the payment of
compensation /or these costs.*
3.2.3.5 Psychic and Emotional Damages
If an individual who is displaced by the condemnation of his resi-
dence is forced to relocate at a considerable distance from that resi-
dence, he may suffer from the disruption of relationships which he has
built up in his old neighborhood. Although most of these dislocation
costs probably will be associated with the psychological stresses of
moving away from family and friends, some direct financial hardship
may arise from the disruption of business and credit relationships
which have been established with local merchants. In addition, even
if this individual succeeds in obtaining a new residence in his old neigh-
borhood, the public project for which his previous residence has been
condemned may so disrupt the neighborhood that it becomes a less con-
venient and less desirable area in which to live. Yet, once again,
provision for the payment of compensation for these psychic costs does
not exist in either traditional eminent domain law or suppleme.ntp.ry
legislation, **
3. 2. 3. 6 Severance Damages
The condemnation of a portion of a parcel of land may adversely
or beneficially affect the value of the portion of the parcel which has
not been condemned. In principle, the measure of the amount of com-
pensation which is paid to the owner of this parcel is the difference
between the value of the parcel before the condemnation and the value
of the uncondemned portion of the parcel after this appropriation.
Thus, both the beneficial and adverse effects of the severance of a
parcel of land are considered in the determination of the appropriate
compensation for this severance. Yet, the courts generally have
ruled that severance effects will influence the amount of compensation
which is paid for the appropriation of a portion of a property only if
these severance effects modify the market value of the uncondemned
land rather than merely the market value of the business or activity
*Bosselman, Newsom, and Weaver (7), pp. 10 and 12.
*#Ibid., pp. 10 and 12; and Klein (54), pp. 1-39.
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which is operated on this land. Moreover, these severance effects
must be clearly attributable to the new public facility and must specif-
ically affect the uncondemned parcel of land.* Clearly, the principle
of adjusting compensation payments to reflect severance effects is not
always honored in practice.
An additional problem arises when an exercise of the power of
eminent domain appropriates a portion of the property of an individual
who owns two or more distinct parcels of land. Theoretically, if these
two or more parcels exhibit a unity of use, severance effects should
influence the payment of compensation to the owner of this property to
the same extent that they would affect the payment of compensation for
the appropriation of a portion of a single tract of land. However, in
practice, the courts have not uniformly permitted the adjustment of
compensation payments to reflect severance effects in situations of
this type.**
3.2.3.7 Impairment of Access
Impairment of access frequently occurs either when a highway
which abuts a commercial property is transformed into a limited
access highway or when a. highway of this type is left untouched while
a new super-highway which diverts much of the traffic which previously
has used the older road is constructed parallel to that road. In either
instance, the owner of the commercial property is damaged by the
reduction of traffic on the road which abuts his property. While this
situation appears to be very similar to the situations in which sever-
ance damages have been permitted to influence compensation payments,
the courts have tended in recent years to rule that an abutting property
owner does not possess any property right which compels the state to
maintain either a road or its traffic under threat of the payment of
damages. ***
3.2.3.8 Hazardous Uses
When a portion of a parcel of land has been condemned for the
development of a hazardous public use, such as a gas transmission
line, a high tension line, or a guided missile site, the prospective
*Edens (40), p. 317.
**Berger (5), pp. 93-95.
**«Ibid. , p. 96.
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development of this use may induce fear or anxiety in the owner of the
uncondemned property. Recent court decisions have established a
trend of permitting the payment of severance damages in these situa-
tions if the proposed use clearly presents an immediate danger and if
the development of this use is not uncertain or remote.* Thus, in
certain restricted instances, compensation can be paid for psychic or
emotional damages.
3. 2. 3. 9 Interest on the Condemnation Award
Appreciable delays frequently occur between the date on which
property is appropriated by an exercise of the right of eminent domain
and the date on which compensation is paid for this appropriation.
Consequently, the courts have ruled that it is proper to pay additional
compensation for these delays in the receipt of the basic compensation
payment. In particular, the courts have decided that property owner.3
should be paid interest on this basic condemnation award throughout
the term of the delay.
The basic problem which has confronted the courts in applying
this decision is the determination of the appropriate interest rate to
apply to the basic compensation payment to calculate the magnitude o;"
the incremental compensation. In addition, the requirement that this
incremental compensation must be paid has increased the total amount
of compensation which is paid in some states to such a great extent that
several state legislatures have enacted statutes which require condemn-
ing agencies to deposit a specified proportion of the expected basic
compensation payment in a trust fund at the time of condemnation. #*
3.2.3.10 Costs of Litigation
If a property owner decides to challenge an exercise of the right
of eminent domain, he probably will incur substantial attorney fees.
Moreover, in the absence of supplementary legislation, these litigation
costs will not be considered in the court's determination of the amount
of compensation which will be paid. At the present time, only a few
states have enacted legislation which permits the reimbursement of
attorney fees by condemning agencies. This granting of reimburse-
ment of legal fees probably will motivate an increase in the challenging
*Ibid. , pp. 96-97.
**Ibid., pp. 92-93.
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of condemnations of private property and may substantially increase
the total cost to the states of acquiring property. However, these
increased costs must be compared with the benefit which society
obtains when it assures that those individuals who normally would not
obtain legal counsel will receive condemnation awards which are con-
sistent with just compensation,*
Clearly, this pattern of reasoning should be applied to any judi-
cial decision to consider or ignore any particular element of damage
to the property owner in the determination of just compensation. Spe-
cifically, the courts should compare the increase in economic effi-
ciency which will be produced if a particular element of damage is
included in judicial compensation decisions with the sum of the admin-
istrative costs which will be incurred if this element is included and
the demoralization costs which will be borne by members of society
if this item is excluded from consideration. Only if this comparison
is favorable should the element of damage be systematically introduced
into the court's decision-making process.**
Application of this criterion undoubtedly will result in the inclu-
sion of several additional elements of damage in the determination of
jusi compensation auu, consequently, will increase the cost of exer-
cising the right of eminent domain. However, since the traditional
method of determining just compensation systematically grants awards
which are less than the full opportunity cost of condemnation and,
hence, encourages the development of public projects which are soci-
ally undesirable, this increase in the cost of condemnation will pro-
mote an improved allocation of real property between the public and
private sectors.
Nevertheless, introduction of this criterion probably will not
produce the inclusion of psychic or emotional costs into the determina-
tion of just compensation. Since those costs are subjective, they are
essentially immeasurable. It is impossible to distinguish valid claims
for substantial psychic costs from attempts to exploit the condemning
agency. Thus, it inevitably will be necessary to continue to rely upon
fair market value as the basic determinant of just compensation. ***
*Ibid. , pp. 97-99.
*:'.'-This analytical technique initially has been proposed in
Michelman (73).
***Edens (40), pp. 321-32Z.
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3.2.4 The Measurement of Just Compensation
The judicial standard for the determination of just compensation
establishes as the appropriate amount of compensation for a property
the price that will be voluntarily negotiated for this property by a hypo-
thetical seller who is willing but not obligated to sell and a hypothetical
buyer who is willing but not obligated to buy. However, since this
price cannot be directly observed in any actual market, it has been
necessary to develop acceptable techniques for the estimation of this
price. Currently, there are three principal appraisal techniques which
are employed to evaluate property in eminent domain proceedings,
These techniques are the market data approach, the income capitaliza-
tion approach, and the reproduction or replacement cost approach.
3.2.4.1 The Market Data Approach
If properties which are identical to the parcel of land •which is
being condemned have been exchanged in a free and open market, the
prices which have been paid for these substitute properties should con-
stitute reliable estimates of the value of the condemned property. Even
if these other properties are merely comparable, but not identical, to
the condemned parcel, their market prices should be valid indicators
of the value of the condemned parcel to the degree that these properties
are similar to the condemned property. Since the computation of an
appraisal value for a property on the basis of comparable sales data
obviously reflects the interaction of supply and demand, this technique
is generally considered to be the most reliable approach to the estima-
tion of the value of condemned properties. In fact, comparable sales
data is accepted in most states as independent substantive evidence of
the market value of condemned property. However, its usefulness in
this manner is restricted to some extent by the inhibitions of the judi-
cial rule concerning the admissability of hearsay evidence. Neverthe-
less, comparable sales data is accepted in all jurisdictions as a founda-
tion for an expert's opinion of the value of a condemned property.
Before the price which has been paid for a particular property
can be utilized in the estimation of the value of a property which has
been condemned, it must be demonstrated that these parcels of land
are similar. This demonstration of similarity must be predicated
upon their geographic proximity to the same centers of economic
activity and their uniformity in quality, size, and use. In addition,
the comparable sale must have occurred within a reasonable period
of time prior to the appropriation of the condemned p.ropcrty. Sales
3.47
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which are consummated subsequent to the date of condemnation are
eliminated from consideration as comparable sales because the prices
which are established in these sales may have been influenced by the
condemnation itself. Finally, the comparable sale must have been a
voluntary exchange in a free and open market. Consequently, the sale
of a property to a potential condemning agency generally is inadmis-
sable as a comparable sale because it may lack voluntariness and
freedom from compulsion, although some states will accept a sale of
this type as a comparable sale if a demonstration of its voluntariness
can be provided.
The courts also refuse to recognize offers to sell or offers to
buy as indicators of the value of a condemned property, presumably
becs.use of the ease with which evidence of this type can be fabricated.
Similarly, appraisals of property value which are made for purposes
other than condemnation are usually excluded from consideration in
eminent domain actions. This judicial inflexibility may be inconsistent
with the attainment of the best possible estimate of the value of a con-
demned property, particularly when valid comparable sales data is
limited. Consequently, the accuracy of the measurement of just com-
pensation might be improved in many instances if the courts would
exhibit greater flexibility in admitting these types of information at
least as evidence to support an expert's appraisal of the value of a
condemned property, *
3.2,4.2 The Income Capitalization Approach
The theory of income capitalization is founded on the fundamental
economic concept that the value of a productive asset is most appropri-
ately measured on the basis of the amount of income that it generates.
Consequently, the income capitalization approach estimates the value
of a condemned property as the amount of wealth which, if it were
invested at the same rate of return which would.have been earned by
this property if it had not been condemned, will yield for the property
owner the same stream of income which would have been generated by
his property if it had not been condemned. Clearly, the estimation of
this amount of wealth requires predictions of both the future stream of
income which the condemned property would have earned and the rate
of return on the value of this property which this stream of income
*Massey (68), pp. 2-3; and Sengstock and McAuliffe (104), pp.
192-206 and 229.
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would have represented. In addition, since the business which occu-
pies the condemned property usually can be relocated and, hence,
generally is not appropriated by the condemning agency, the stream of
income which must be forecast is not the total stream of income which
is generated by this business on this property, but merely the portion
of this total stream of income which constitutes the rental income of
the property.
This necessity of extensive forecasting and allocation of income
causes the income capitalization approach to be the most complicated
and the most conjectural method of estimating the value of a condemned
property. Moreover, since the value which is estimated using this
approach is extremely sensitive to the rate of return at which the
stream of rental income is capitalized, this approach also is the most
speculative appraisal technique. Consequently, the courts arc very
reluctant to accept the capitalization of income as the sole basis for
the estimation of the value of a condemned property, although they fre-
quently will admit evidence of this type as confirmation of appraisals
which have been produced by other methods. Furthermore, the courts
occasionally will accept the capitalization of income as the exclusive
basis for the appraisal of the value of certain special purpose prop-
erties which are exchanged too infrequently to permit the obtaining of
valid comparable sales data, such as large-scale rental property. #
3. 2. 4, 3 Reproduction or Replacement
Cost Approach
To determine reproduction costs, an estimate is obtained of the
cost of building the condemned structure anew on the condemned prop-
erty. The estimated physical and functional depreciation of the exist-
ing structure is then deducted from this estimated cost to produce an
appraisal of the replacement cost of the existing use. Replacement
cost evidence is admissible in the determination of the value of a con-
demned property if the existing structure is adjudged to be suitable for
the property on which it is constructed. However, this evidence gen-
erally is not admissible if the structure is so inferior that it constitutes
a detriment to the value of the property or if it is so expensive and
elaborate that it is inappropriate for the property and its neighborhood.
*Level (60); Massey (68), p. 3; and Sengstock and McAuliffe (104),
pp. 206-22Z and 229.
3.49
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The replacement cost approach has been widely criticized on the
grounds that it initiates its evaluation process with an estimated cost
which may bear no relationship to the value of the property (in the
sense that the property owner would not choose to construct a structure
of this type if his property were vacant) and then adjusts this estimated
cost by deducting from it an estimate of depreciation which usually
must be calculated without sufficient factual data. Nevertheless,
because of the absence of any other proof of value, the replacement
cost approach is often, employed to appraise the value of special pur-
pose properties which are relatively unique and infrequently exchanged,
such as churches or schools,*
3.2.4.4 The Objectivity of the
Measurement Techniques
Although the -established judicial standard for the determination
of just compensation has been adopted by the courts in an attempt to
assure objectivity in the appraisal of the value of condemned properties,
the application of this standard to the estimation of the value of a par-
ticular property requires the exercising of substantial subjective judg-
ment by the appraiser. Even when the appraiser employs the market
data approach, judgment is required in the selection of properties
which are considered to be comparable to the condemned property.
Moreover, when comparable sales data are unavailable for a partic-
ular type of property, the utilization of the income capitalization
approach or the replacement cost approach requires the exercising of
considerably more discretion by the appraiser. Since each appraiser
unavoidably introduces his own attitudes and prejudices into his esti-
mation of the value of any property, it is not surprising that different
appraisers frequently assign different estimated values to the same
property, **
3.Z.5 Procedural Considerations
3.2.5.1 Prior Negotiations
Condemning authorities normally attempt to avoid lengthy, expen-
sive judicial condemnation proceedings by attempting to acquire desired
property through direct voluntary negotiation. However, situations
*Level (60); Massey (68), p. 3; and Scngstock and McAuliffe (104),
pp. 222-230.
**Edens (40), p. 317.
3.50
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occasionally arise in which a condemning authority can function most
efficiently if it resorts directly to the judicial process without making
any attempt to negotiate a mutually agreeable purchase of the property.
For example, a condemning authority might he suddenly confronted
with a problem whose resolution can be performed effectively only if
the authority can obtain the immediate acquisition of a particular parcel
of land. Yet, several states have enacted legislation which requires
the condemning authority to attempt to negotiate an amicable purchase
of any property before it initiates condemnation proceedings. Inflexible
compliance with this legislation may in some instances introduce sub-
stantial inefficiencies into the operations of that agency.*
3.2.5.2 The Right to Appeal
Condemnation Awards
Several recent court decisions have addressed, but have not com-
pletely resolved, the issue of the effect that payment of a preliminary
condemnation award should have on the right of either the condemning
authority or the owner of the condemned property to appeal the magni-
tude of this award. If the condemning authority is prohibited from
taking possession of a property unless it pays the preliminary condem-
nation award and if it surrenders its right to appeal (he magnitude of
this award either when it pays the award or when it acquires the prop-
erty, the authority may incur substantial increases in project costs if
it chooses to appeal the award. Specifically, the delay in the initiation
of this agency's project which is generated when the condemning author-
ity is denied immediate possession of the condemned property while it
appeals the condemnation award will impose sizable opportunity costs
upon the authority. In fact, in extreme circumstances, these costs
may be sufficiently large to cause the cancellation of the project.
Similarly, if the owner of the condemned property surrenders
his right of appeal when he accepts a preliminary condemnation award,
any decision to appeal the magnitude of this award will deprive him of
both the use of his property and the use of any provisional compensa-
tion for this property until the appeals procedure has been concluded.
Conversely, if this property owner is permitted to acquire and spend
a provisional compensation award while an appeal is being processed
by the courts, it is conceivable that, when a final determination of the
appropriate amount of compensation is achieved, this individual may
Merger (5), pp. 99-100.
3.51
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have withdrawn and squandered an amount of income in excess of the
final condemnation award and that the condemning authority will be
unable to recover the difference between the property owner's actual
withdrawals from the provisional award and the award which ultimately
is authorized.
Clearly, some reconciliation by the courts or the legislatures of
these competing public and private interests in a manner which reason-
ably accounts for the unavoidable tradeoffs between these interests
would be desirable.*
3.2.5.3 Private Input Into Condemning
Authority Decisions
The existing administrative procedures which are employed by
condemning authorities frequently do not adequately consider the inter-
ests of the individual owners of condemned property. Although these
property owners generally have the right to appear at a public hearing
which is conducted by the condemning authority, this right may be
illusory to the extent that the full details of the authority's proposed
project are not enunciated prior to this hearing and, hence, the prop-
erty owners are not granted sufficient time to pTepsre cases to chal-
lenge the propriety of the project.
In addition, most state legislatures have not delineated either the
scope of the courts' authority to review the decisions of condemning
authorities or the procedures which the courts must follow in conduct-
ing a review of one of these decisions; although some jurisdictions have
enacted administrative procedures acts which address the latter issue
by specifying both the manner in which the condemning authority should
make its determinations and the method by which the individual prop-
erty owner can protest this decision. The universal adoption by state
legislatures of both statutes of this type which adequately consider the
rights of the owner of the condemned property and legislation which
specifies the power of the courts to review the condemnation, and com-
pensation decisions of condemning authorities would greatly increase
the predictability and equity of the condemnation process. **
*Ibid. , pp. 100-103.
**Ibid. , pp. 103-104.
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3. 3 Conclusions
The preceding discussions of the operational problems associated
with the implementation of such traditional land use control techniques
as municipal zoning, subdivision regulation, building codes, and the
exercise of the right of eminent domain clearly demonstrates that these
mechanisms do not constitute, either individually or in combination,
ideal methods for the regulation of private real property. Each of
these techniques is restricted in its application and limited in its effec-
tiveness by numerous administrative, economic, judicial, legal, and
political problems.
However, this chapter has not demonstrated either that the uncon-
strained market could perform the allocation of activities to parcels of
land more efficiently, that any alternative land use control mechanisms
could regulate the use of real property more effectively, or that any
modifications of these traditional techniques could cause them to func-
tion more satisfactorily. The resolution of these issues constitutes the
primary objective of the remainder of this report.
3.53
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4. 0 ENVIRONMENTAL QUALITY AND THE
OPTIMAL CONTROL OF MARKET FAILURE
If the assumptions which underlie the economic model of a per-
fectly competitive market were universally satisfied in all actual
markets for goods and services, all impacts upon the natural environ-
ment which might be produced by activities performed in these markets
would be appropriately taken into account in the decision making of each
individual who participates in any of these markets. However, these
assumptions are seldom, if ever, completely satisfied in any actual
market. In fact, substantial deviations from full compliance with these
assumptions are observed in many markets due to the existence of
externalities, public goods, or increasing returns to scale in those
markets.
This chapter both describes the problems which arise in the attain-
ment of economic efficiency and the attainment of the most socially
desirable allocation of resources when each of these types of market»
failure prevails in any particular market and identifies and evaluates
the effectiveness of the various public policies which might be employed
to resolve these problems in specific situations. Thus, Section 4. 1
discusses the nature and the potential resolution of environmental
problems attributable to externalities; Section 4.2 contains an analogous
treatment of the environmental problems associated with public goods;
and Section 4.3 develops a similar analysis of the environmental prob-
lems arising from increasing returns to scale. Finally, Section 4.4
presents some general conclusions concerning the manner in which the
most socially desirable public policy for the control of any particular
market failure can be selected for implementation.
4.1 Externalities'
Externalities exist whenever the production or consumption
opportunities of individual members of society are directly affected by
resource allocation decisions of other society members -- decisions
over which the externally affected individuals have no control. To be
economically relevant, these external effects must not be attributable
solely to the changes in the equilibrium set of market prices which
occur as the economy responds to changes in supply and demand condi-
tions. Indeed, these adjustments of equilibrium prices constitute the
4. 1
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primary mechanism through which the market mechanism rations
goods and services among alternative users and uses. Finally, the
external effects must not result from the performance of malicious
actions by the external decision makers. Rather, they must be pro-
duced only incidentally by these individuals as they pursue legitimate
activities.
Externalities which satisfy these conditions can, and frequently
do, prevent the market mechanism from attaining an economically
efficient allocation of resources. Specifically, whenever those individ-
uals whose actions generate relevant externalities fail to consider the
implications of these external effects in their decision making, it is
likely that the resource allocation which is achieved at equilibrium
will not be Pareto optimal and, hence, that it will be theoretically
possible to specify an infinite number of reallocations of resources
which will increase the welfare of at least one member of society with-
out decreasing the welfare of any other member of society. For
example, if a firm, in conjunction with the production of its desired
output, legally generates smoke which adversely affects the health and
welfare of all individuals who reside in the neighborhood of the firm
and if the firm fails to incorporate the external costs which it imposes
upon its neighbors into its production (and smoke generation) decisions,
the firm's equilibrium level of smoke generation generally will exceed
the economically efficient level. When this situation prevails, economic
efficiency will be enhanced if the firm reduces its generation of smoke
to that level at which the cost which it will incur in performing any
additional pollution abatement exceeds the gains which are obtained by
its neighbors from that additional abatement and if the cost of the abate-
ment which is performed is financed exclusively from the gains which
are obtained by the firm's neighbors as a result of this reduction in
smoke generation. This financing strategy guarantees that no member
of society -- including the smoke generating firm -- will experience a
lower level of welfare when smoke generation is curtailed than he
obtains when no abatement is performed. Moreover, unless the cost
which is incurred by the firm in performing the reduction in smoke
generation is precisely equal to the total gains which are obtained by
all of the firm's neighbors from this abatement, this financing strategy
will not be unique. Rather, it will be possible to produce this increase
in economic efficiency with an infinite number of alternative financing
strategies which are differentiated only by the relative magnitudes of
the net gains which are obtained by the various members of society.
4.2
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Thus, as this example illustrates, when relevant externalities
prevail it is generally possible to identify the direction in which the
equilibrium allocation of resources will deviate from the economically
efficient allocation of resources, to specify the manner in which resour-
ces should be reallocated to attain the economically efficient allocation,
and to describe the method by which these modifications should be
financed to promote Pareto optimality. However, the recognition and
resolution of externality problems also requires both the identification
of those market situations in which the externalities which arise can be
expected to prevent the market mechanism from attaining economic
efficiency and the isolation of techniques which can be employed to
induce or require those individuals who are involved in these relevant
externality situations to modify their behavior in a manner which is
consistent with the attainment of economic efficiency. The resolution
of these two issues is the objective of the remainder of this section.
4. 1. 1 The Possibility of Resolution by Negotiation
To appreciate the possibility of a negotiated resolution of an
externality situation, it is necessary to recognize the reciprocal nature
of any externality situation. This principle is described particularly
well by Cease, who states:
"The traditional approach has tended to obscure the
nature of the choice that has to be made. The ques-
tion is commonly thought of as one in which A inflicts
harm on B and what has to be decided is: how should
we restrain A ? But this is wrong. We are dealing
with a problem of a reciprocal nature. To avoid the
harm to B would inflict harm on A. The real ques-
tion that has to be decided is: should A be allowed
to harm B or should B be allowed to harm A ? The
problem is to avoid the more serious harm. "*
The validity of this principle can be demonstrated easily within
the context of the preceding smoke generation example, where it is
observed that the unrestricted generation of smoke by the firm both
*Coase (19), pp. 1-2.
4.3
-------
permits the earning of additional profits by the firm and imposes ex-
ternal costs upon the firm's neighbors, while restriction of the firm's
generation of smoke both provides gains to the firm's neighbors and
imposes smoke control costs upon the firm. Thus, it can be con-
cluded that, in any externality situation, the external effect is caused
by both the resource owner who generates the effect and the resource
owner who receives it. Consequently, if the optimal allocation of
resources is to be attained, it is desirable that both of these resource
owners should take account of the external effect in making their re-
source allocation decisions. In principle, this objective can be attained
if an individual who desires to modify the behavior of another individual
who is generating an externality engages in trade with that other in-
dividual which moves both of them to preferred positions where no
additional mutually agreeable trades are available and, hence, Pareto
optimal equilibrium prevails.
However, before exchange can occur, it is necessary to establish
an assignment of property rights in the externality situation. Thus, in
the smoke generation example, it must be established cither that the
firm possesses the right to generate any quantity of smoke which it
determines to be desirable (as has been implicitly assumed in the
example) or that the firm's neighbors possess the right to an environ-
ment which contains at most a specified quantity of smoke (possibly
zero). Yet, after an assignment of property rights has been clearly
specified, it can be demonstrated that, if these property rights are
transferable* and rigidly enforced and if there are no costs associated
with the negotiation and enforcement of transactions, any particular
assignment of property rights will produce an economically efficient
allocation of resources. Specifically, when these conditions are
satisfied, the stipulated assignment of property rights will provide an
incentive to one of the two parties who are involved in the externality
situation to attempt to change the extent to which external effects art-
gene rated by offering inducements to the other party to modify his
behavior. Thus, at the extremes, if the resource owner who produces
an external effect (e.g., the smoke generating firm) is declared to be
^Property rights with respect to liability for damages are trans-
ferable if the government enforces liability rules only upon appeal by
one of the parties who are involved in the externality situation. This
enforcement policy introduces the possibility of exchange between these
parties.
4.4
-------
completely liable for the damages caused by this external effect, he
will be motivated to pay an indemnity to the resource owner who
receives the external effect (e.g., the firm's neighbors) to secure that
resource owner's acquiescence to the production of additional output;
while, conversely, if the resource owner who produces an external
effect is declared to have no liability for the damages caused by this
external effect, the resource owner who receives the external effect
will be motivated to pay a bribe to the externality-producing resource
owner to induce that resource owner to reduce his production. In
either case, whenever the resource owner who produces the external
effect decides to increase his production, he incurs a cost in the form
of eithe r an increased indemnity payment to or a foregone bribe pay-
ment from the resource owner who receives the effect. Similarly,
whenever the resource owner who receives the external effect decides
to decrease the extent to which he absorbs this effect, he incurs a cost
in the form of e ither a foregone indemnity payment from or an
increased bribe payment to the resource owner who produces the effect.
Consequently, whenever either of these parties makes his resource
allocation decisions, he appropriately incorporates the full social cost
of his activities into his decision-making process. The inevitable
result of this procedure is the attainment of an economically efficient
allocation of resources.
It can also be demonstrated that, since the marginal cost associ-
ated with any particular increase in the production of an external effect
is unaffected by the assignment of different systems of property rights,
the same economically efficient allocation of resources will be attained
regardless of the particular system of property rights which is adopted,
so long as the differences in the distributions of wealth which are
associated with the various systems of property rights have no effect
upon demand patterns. Thus, in summary, this analysis asserts that
if the income elasticity of demand is zero in all markets (including the
market for the external effect) and ji_the costs of negotiating and en-
forcing transactions are zero, the market resolution of any externality
problem will be both economically efficient and allocatively neutral
with respect to the assignment of property rights.*
*Sec Coase (19) for a more thorough derivation and analysis of
these assertions.
4. 5
-------
However, several researchers have conclusively demonstrated
that the asserted allocative neutrality of alternative assignments of
property rights will not prevail when some of the resource owners who
are involved in the externality situation are merely consumers,* when
the income elasticity of demand for at least some goods in the economy
is not zero, ** or when the costs of negotiating and enforcing trans-
actions are positive.*-'-* Since one or more of these conditions are
extremely likely to exist in any realistic externality situation, it is
obviously unreasonable to expect that negotiated resolutions of exter-
nality situations will be allocatively neutral with respect to alternative
assignments of property rights.
Yet, even under these conditions, each alternative assignment of
property rights will generate an economically efficient allocation of
resources relative to that assignment of property rights. However,
different assignments of property rights usually will generate different
economically efficient allocations of resources. More specifically, in
any particular externality situation, the production of the externality
will be greater if the resource owner who produces the external effect
is declared to have no liability for the damages attributable to this
external effect than if this individual is declared to be completely liable
for these damages. Consequently, in any realistic externality situation,
the adoption of a. particular assignment of property rights may be
virtually equivalent to selecting a particular economically efficient allo-
cation of resources at equilibrium.
Moreover, since positive transactions costs inhibit exchange,
the disparity between the allocations of resources which prevail at
equilibrium under different assignments of property rights in any ex-
ternality situation will increase as transactions costs increase. In
particular, as the externality situation becomes more complex and as
the number of resource owners who are involved in this situation in-
creases, transactions costs can be expected to increase and, hence,
deviations from allocative neutrality are likely to expand. In fact, it
is conceivable that in some externality situations transactions costs
*Dolbear (39), pp. 95-97 and p. 102 and Mishan (11), pp. 61-66
and pp. 83-84.
**Samuels (97), pp. 6-12 and Weld (114), p. 609.
**#Randall (88), pp. 43-44 and Samuels (97), pp. 19-20. For a
more detailed discussion of all of these qualifications of the assertion
of allocative neutrality, see Sections 2. 1. 6 and 2. 1. 9 of this report.
4.6
-------
may be so high that movements away from the initial allocation of re-
sources which is specified by the prevailing system of property rights
may be impossible.
Recognizing this possibility, Demsetz* has asserted that the
absence of an observable market for an externality may constitute an
economically efficient outcome since, when this situation exists, the
transactions costs which must be incurred to establish a market for
this externality must exceed the benefits which will be obtained by
society if this market is established. While this assertion is unambigu-
ously true whenever the same level of transactions costs must be in-
curred for all of the alternative assignments of property rights which
might be adopted in this externality situation, its validity is uncertain
if different level of transactions costs are associated with different
assignments of property rights.
Thus, as several researchers** have stated and at least one
researcher*** has demonstrated empirically, it is fallacious to con-
clude from an observation that no agreement has been negotiated for
the internalization of a particular externality that no agreement can be
negotiated for the internalization of this externality. It is frequently
possible that the adoption of a different assignment of property rights
may permit the negotiation of an agreement for the internalization of
the externality which has been unattainable under the initial assignment
of property rights. For example, in an externality situation in which
a single firm is generating smoke which adversely affects a large
number of neighboring property owners, a realignment of property
rights from a system in which the smoke generating firm is not liable
for the damages which are attributable to his activities to a system in
which he is fully liable for these damages is likely to promote the
negotiated internalization of some externalities which would not have
been internalized under the initial assignment of property rights. Under
the initial assignment of property rights, any of the neighboring pro-
perty owners will receive the same benefit from any reduction in the
generation of smoke regardless of the magnitude of his contribution
toward defraying the cost of providing this reduction in smoke generation.
#Demsetz (35), pp. 13-14.
**McKean (70), pp. 625-626; Mishan (77), pp. 70-75; Randall (88),
pp. 45-46; and Samuels (97), pp. 21-23.
***Crocker (23).
4.7
-------
The net result of the adoption of this individually rational behavior
pattern by all of the neighboring property owners obviously will be the
provision of an inefficiently low level of smoke abatement. Conversely,
under the alternative assignment of property rights, the firm will not
confront any equivalent incentive to understate his willingness to pay
the neighboring property owners for the opportunity to emit smoke.
Hence, the negotiated internalization of the costs attributable to the
external effects associated with smoke generation will be greater under
this system of property rights unless each individual neighboring pro-
perty owner, or a relatively small coalition of these property owners,
is permitted to exercise effective veto power over the firm's genera-
tion of any quantity of smoke.
Yet, despite the obvious differences in the extent to which negotia-
tion may permit the internalization of externalities under different
assignments of property rights, it remains true that the allocation of
resources which prevails at equilibrium under each assignment of pro-
perly rights constitutes an economically efficient allocation of resources
relative to that assignment of property rights. However, not all of
these efficient allocations of resources will constitute a maximization
of net social products. Thus, if the maximization of net social product
is desired, society must make a choice among different economically
efficient allocations of resources.
Nevertheless, if individual preferences are weighted positively
in the determination of the level of net social welfare which is associ-
ated with any particular allocation of resources, there appears to be
substantial justification in any externality situation to adopt an assign-
ment of property rights which provides to the individuals who are in-
volved in this externality situation an ample opportunity to express these
preferences. Moreover, since the observed purchasing behavior of
an individual in a market situation is generally acknowledged to be the
most reliable available indicator of the economic preferences of that
individual, it appears desirable in externality situations to adopt assign-
ments of property rights which will maximize the opportunities of the
individuals who are involved in those situations to engage in market
exchange which will promote the internalization of the externality.
Thus, in the absence of overriding social considerations, it appears
desirable to rely upon the negotiated resolution of externality problems
in any situation in which voluntary negotiation of the permissible level
of the externality is feasible. In particular, voluntary negotiation
undoubtedly can be relied upon to generate the highest attainable level
of not social product in those externality situations in which onr pro-
perty owner's use of a particular porfion of his properly for the storage
4.8
-------
of compost produces objectionable odors on his neighbor's property
or a situation in which one property owner's use of a power mower
during particular hours of the day severely disturbs the sleep of resi-
dents of adjacent properties.
4. 1.2 The Appropriate Nature and Role of
Public Policy
As the number.of individuals who are affected by any particular
externality problem increases, the transaction costs associated with
the attainment of a negotiated resolution of this problem also increases
and, hence, the economic and social desirability of relying upon volun-
tary negotiation for the resolution of this problem decreases. In par-
ticular, in any situation in which it is discovered that some typo of non-
market mechanism may involve a lower level of transactions costs
than is attainable through a negotiated inte rnalization of the externality
under any assignment of property rights, it is conceivable that the
maximization of net social product may require the introduction of some
form of governmental intervention.* Specifically, when the number of
individuals who are affected by a particular externality problem be-
comes so large that the inte rnalization of the externality assumes the
nature of a public good for all of these individuals, the: economic and
social desirability of governmental intervention is virtually assured.
This situation undoubtedly pertains to the vast majority to the air and
water pollution phenomena which are generally acknowledged to be
social problems.
4.1.2.1 Unilateral Taxes and Subsidies
The traditional economic resolution of these large-scale exter-
nality problems has its origins in the writings of Pigou, ** who asserts
that an economically efficient allocation of resources is attained by a
society when its national dividend is maximized. Moreover, the
national dividend will be maximi'/.ed when the private marginal not
product is equal to the social marginal net product in all uses. Thus,
inefficiency exists in every activity in which this equality is not satis-
fied. To eliminate this inefficiency, Pigou proposes the provision of
*Demsetz (34), p. 34, and Randall (88), pp. 45-46, concur in
this conclusion.
**Pigou (85).
4.9
-------
incentives which will induce those firms which are generating externali-
ties to produce those levels of output which will maximize the national
dividend.
More specifically, Pigou recommends the development of a sys-
tem of taxes and subsidies which will modify the cost function of an
externality-producing firm in a manner which will cause the firm's
profit-maximizing output level to correspond to the socially optimal
output level. This recommendation generally has been interpreted as
a proposal that the price of the output of the firm should be modified to
reflect more accurately the social marginal net product through the
imposition of specific (per unit) excise taxes and subsidies upon this
output. Thus, if the firm is generating an external diseconomy, a
specific excise tax should be imposed to induce a reduction in output;
while, if the firm is creating an external economy, a specific excise
subsidy should be provided to motivate an increase in production.
However, Plott* has demonstrated that, unless the desired out-
put of the firm and the externality are produced in fixed proportions,
this procedure is fundamentally incorrect. Instead, the corrective tax
or subsidy must be imposed cither on the particular output which con-
stitutes the externality (e. g. , smoke, noise level, water-borne efflu-
ent) or, under certain conditions, on the resource input from which the
externality is generated. Moreover, if the corrective tax or subsidy is
imposed on the specific output which constitutes the externality, it
should be set at a level equal to the sum of the values of the incremental
external effects which are incurred by all of the individuals who are
involved in the externality situation at the economically efficient rate
of production of that output. This requirement is expressed somewhat
more succinctly in the following equation:
T = £ ME.
._, 1
where T = the optimal tax or subsidy per unit of the
externality produced,
*Plott (86).
4. 10
-------
ME. = the marginal evaluation of the economically
efficient rate of production of the output which
constitutes the externality by the i Hi individ-
ual who is involved in the externality situation,
and
n = the total number of individuals who are affected
by the externality problem.
Observe that if the externality is an external economy for the i —
individual, ME. will be positive; while if the externality is an external
diseconomy for the iJll individual, ME. will be negative. Thus, if
n
"E ME. is positive, the externality constitutes an external economy
i=l l
for the society, while if this summation is negative, the externality
constitutes an external diseconomy for the society.
To promote economic efficiency in the generation of an external
economy, the government should either pay to the firm which generates
this externality a specific subsidy equal to T for each unit of the exter-
nality which it produces or impose upou this firm a tax equal to T for
each unit by which its production of the externality falls short of the
economically efficient production ra(e of this externality. Similarly,
to promote economic efficiency in the generation of an external dis-
economy, the government should either impose upon the firm which
generates this externality a tax equal to (-T) for each unit of the ex-
ternality which it produces or pay to this firm a subsidy equal to (-T)
for each unit by which its production of the externality falls short of the
rate of production of the externality which the firm would select in the
absence of any governmental intervention. Since, if the firm desires to
maximize profits, it will choose to produce any unit of the externality
for which the total revenue from production (including subsidies) ex-
ceeds the total cost of production (including taxes) and will refrain from
producing any unit of the externality for which the total cost of produc-
tion (including taxes) exceeds the total revenue from production
4. 11
-------
{including subsidies), these taxation and subsidization policies will,
in general, induce the firm to adjust its rate of production to the eco-
nomically efficient rate. *
However, numerous researchers** have challenged the assertion
that both taxes and subsidies constitute equally effective mechanisms
for the internalization of either external economies or external disecon-
omies. In any externality situation the determination of the appro-
priate total magnitude of a tax or a subsidy requires the comparison
of the actual level at which an externality is produced to a specified
base level of production of that externality. The development of either
an economically efficient taxation mechanism for the internalization
of an external diseconomy or an economically efficient subsidy mecha-
nism for the internalization of an external economy is not difficult since
no production of the externality constitutes an effective specified base
level,for either of these mechanisms. However, the development of an
economically efficient subsidy mechanism for the internalization of an
external diseconomy or an economically efficient taxation mechanism
for the internalization of an external economy is likely to be substan-
tially more difficult. In particular, the specified base level of exter-
nality production for a subsidy mechanism for the internalization of at
external diseconomy must be at least as great as the level which the
producer of the external diseconomy would choose to produce in the
absence of any internalization of the externality; while the specified
base level of externality production for a taxation mechanism for the
internalization of an external economy must be precisely equal to the
level which would be produced if the externality were completely
internalized. To guarantee that these conditions will be satisfied,
*Goetz and Buchanan (47) and Schall (103) have demonstrated that
these standard taxation and subsidization policies generally will not
produce an economically efficient allocation of resources in externality
situations which incorporate reciprocal externalities among different
firms in a single perfectly competitive industry. Similarly, Dolbear (39)
has proven that these standard policies generally will not promote
economic efficiency in externality situations in which the producer of
the externality is a utility maximizing consumer. However, as Hay
and McGowan (50) and Dolbear have demonstrated, in both of these cases
the deficiencies of the standard policies can be remedied by introducing
cither a lump sum subsidy or a lump sum tax in addition to the standard
specific tax or subsidy.
**Sec Dolbear (39), pp. 100-101 and p. 103; Kamicn, Schwartz,
and Dolbear (53); Mumcy (79); and Tybout (110), pp. 261-262.
4.12
-------
the administrative authorities which arc responsible for the implemen-
tation of these mechanisms must have complete knowledge of the cost
constraints and revenue opportunities which confront the producers of
the externalities. While it is conceivable that acceptable specified
base levels for these mechanisms might be determined initially, it is
unlikely that these base levels will be maintained at effective levels as
the market conditions facing the externality producers change over
time. If, at any time, the cost and revenue conditions confronting the
producer of an external diseconomy cause his profit-maximizing pro-
duction level of this externality to exceed the specified base level, the
subsidy mechanism will cease to be effective in inducing the internali-
zation of the external diseconomy. Similarly, if the profit opportunities
confronting the producer of an external economy cause his profit-
maximizing production level of this externality to deviate in either
direction from the specified base level, the taxation mechanism will
cease to generate an economically efficient allocation of resources.
Once again, to assure that the specified base levels will be adjusted
appropriately to avoid these outcomes, it is required thai the adminis-
trative authorities must have complete knowledge of the profit opportuni-
ties of the externality producer. Since the likelihood that these condi-
tions will be satisfied in any realistic situations is extremely low, it
is very unlikely that both taxation and subsidization will be equally
effective mechanisms to induce the internalization of cither external
economies or external diseconomies. Rather, it is virtually certain
that taxation will be more effective than subsidization in inducing (he
internalization of external diseconomies; while subsidization will be
more effective than taxation in inducing the internalization of external
economies.
4.1.2.2 The Desirability of Bi-Lateral
Taxes and Subsidies
Although unilateral taxation is generally conceded to be superior
to unilateral subsidization for the resolution of external diseconomy
problems and unilateral subsidization is generally conceded to be
superior to unilateral taxation for the resolution of external economy
problems, several researchers* contend that neither of these policies
is capable of inducing the complete internalization of externalities
*Buchanan (13), Buchanan and Stubblcbinc (15), Furubotn and
Pejovich (43), and Turvey (109).
4. 13
-------
because each fails to consider the reciprocal nature of any externality-
situation. In particular, Buchanan and Stubblebine contend:
"The important implication to be drawn is that full
Pareto equilibrium can never be attained via the
imposition of unilaterally imposed taxes and sub-
sidies until all marginal externalities are elim-
inated. If a tax-subsidy method, rather than
"trade" is to be introduced, it should involve
bi-lateral taxes (subsidies). Not only must B's
behavior be modified so as to insure that he will
take the costs externally imposed on A into account,
but A's behavior must be modified so as to insure
that he will take the costs "internally" imposed on
B into account. In such a double tax-subsidy scheme,
the necessary Pareto conditions would be readily
satisfied. "#
For example, if a community adopts a unilateral taxation mechanism
for the control of air pollution under which the individuals who are
adversely affected by this externality are not paid compensation for the
pollution which they absorb at equilibrium, these individuals will fail
to recognize the full social cost associated with the imposition of more
stringent restrictions upon the generation of air pollution and, hence,
will be motivated to seek the adoption of these additional, inefficient
restrictions. Consequently, it has been recommended that, to preclude
this possibility, all of the parties who are involved in this externality
situation should be compelled to recognize the full social cost of their
actions through the imposition of a bi-lateral system of taxes and sub-
sidies upon both the emitters and the recipients of the air pollution.
The implementation of this recommendation clearly is substan-
tially more difficult than the implementation of a unilateral tax or sub-
sidy. As explained by Regan:
"The reciprocal nature of most externalities means that
Pigou considerably underestimated the difficulty of find-
ing regulatory (tax-subsidy) schemes which would
^Buchanan and Stubblebine (15), p. 383.
4. 14
-------
guarantee internalization. . . In general to set up an
appropriate tax-subsidy scheme might require as much
information on the part of the regulating agency as
would be required for centralized decision-making.
The market-mechanism-plus-regulation, then, is no
certain high road to efficiency.*
However, as Baumol** demonstrates, in those situations in which there
are a large number of recipients of an externality (e. g. , most air or
water pollution situations and many noise pollution situations), the
introduction of an internalization mejchanism under which these recipi-
ents are paid compensation for the external effects which they absorb
may be unnecessary. In these situations, the external effect constitutes
a public externality and the control of the external effect constitutes a
public good. Thus, Baumol asserts:
"As with all public goods, an increase in one user's
consumption does not reduce the available supply to
others. Hence, the appropriate price (compensation)
to a user of a public good (victim of a public exter-
nality) is zero except, of course, for lump sum pay-
ments. Thus, perhaps, rather than saying there is
no price that will yield an optimal quantity of a public
good (externality), it may be more illuminating to
say that a double price is required: a nonzero price
(tax) to the supplier of the good, and a zero price to
the consumer. Of course, no ordinary price can do
this job, but a Pigouvian tax, without compensation
to those affected by an externality, can indeed do the
trick. "***
Yet, even this assertion requires qualification. In particular,
Mohring and Boyd*#*# show that, even when there are a large number
of recipients of an externality, a unilateral tax or subsidy will unambig-
uously produce an economically efficient allocation of resources only
if the control of the externality constitutes a pure public good for each
recipient of this externality (i.e. , only if the quantity and quality of
*Regan (90), pp. 436-437.
**Baumol (4), pp. 309-312.
***Baumol (4), p. 312.
###*Mohring and Boyd (78), pp. 352-356.
4. 15
-------
any modification of the production of the external effect which is obtain-
ed by each recipient of this effect is completely unaffected by any action
which can be taken by this individual). However, if a recipient of the
externality can affect the extent to which he benefits from the control
of the externality by changing his location, his scale of operation, or
any other decision, the attainment of economic efficiency requires that
this recipient must be compelled to recognize the impact that his initia-
tion of any of these actions will have upon the socially optimal activity
levels of the producers of the externality. In many instances, compel-
ling this recognition may require the imposition o.f bi-latcral tax;>s and
subsidies.
For example, if the control of air pollution through (he imposition
of an unilateral tax upon the emitters of air pollution induces additional
individuals to locate in the neighborhood of these emitters, the execu-
tion df these locational decisions will increase the marginal damages
which are attributable to the prevailing level of air pollution. If the
unilateral tax has initially been set at a rate equal to the value of the
pollution which will prevail when the socially optimal allocation of
resources has been attained, these locational adjustments merely will
constitute the mechanism through which the initial economically efficient
allocation of resources will be transformed into the- socially optimal
resource allocation at equilibrium. Excessive locational adjustment
will not occur because the unilateral tax will induce the emitters of air
pollution to generate the socially optimal level of pollution; while the
existence of this level of air pollution will discourage the location of an
inefficiently large number of recipients of air pollution in the neighbor-
hood of these emitters.
However, if the unilateral tax has initially been set at a rate
equal to the value of the marginal damages which are attributable to
the prevailing level of air pollution, the induced movement of additional
individuals into the neighborhood of the emitters of air pollution will
cause the value of the marginal damages which are attributable to this
pollution to exceed the established tax rate and, hence, will cause the
economically efficient levels at which these emitters should generate
air pollution to become less than the prevailing levels at which they
presently are generating pollution. To rectify this deviation from
economic efficiency within the context of a unilateral taxation mechanism,
the unilateral tax must be increased to a rate equal to the increased
value of the marginal damages which are attributable to the prevailing
level of air pollution. Moreover, this process of adjusting the unilateral
tax rate must be repeated until a particular adjustment of the tax rate
4. 16
-------
which induces no movement of additional individuals into the neighbor-
hood of the emitters of the pollution is introduced. When this condition
is achieved, the prevailing unilateral tax rate will be precisely equal
to the value of the marginal damages which are attributable to the pre-
vailing level of air pollution and, consequently, the socially optimal
allocation of resources will have been attained. *
Yet, unless the implementation of this adjustment process is
perfectly costless, it may be more economically and administratively
efficient to induce the recipients of the air pollution to take the conse-
quences of their locational decision into account more directly, possibly
by imposing upon each of these recipients a site or franchise tax equal
to the decrease in the net social product of emitters of air pollution
which will result if that individual, carries out his location decision.
Thus, a bi-lateral taxation or subsidization mechanism may be required
for the attainment of economic efficiency whenever the control of an
externality does not constitute a pure public good for all recipients of
this external effect. **
Finally, Marchand and Russell*** demonstrate that if the cost
functions of the recipients of an external diseconomy are non-separable
(i.e. , if the magnitude of the external cost attributable to the external
diseconomy is affected by the output decisions of the recipients of the
externality)****, neither a bi-iateral subsidization mechanism nor a
bi-lateral taxation mechanism will generate the optimal allocation of
resources which evolves when both the producers and the recipients of
the external diseconomy cooperate in the maximisation of their joint
profits. Rather, the adoption of a subsidization mechanism will result
in the production of an inefficiently high level of output by the producers
of the external diseconomy and an inefficiently low level of production
by the recipients of the externality; while the introduction of a taxation
mechanism will induce the production of an inefficiently low level of
output by the producers of the external diseconomy and an inefficiently
high level of production by the recipients of the externality. Yet, in
this same situation, an appropriate unilateral taxation or subsidization
mechanism can induce an internalization of the external diseconomy
which will produce the optimal allocation of resources. Moreover, an
*Baumol (4), pp. 314-315.
**Mohring and Boyd (78), pp. 354-356.
***Marchand and Russell (66).
*#**Formally, a cost function C (q,, q^) is non-separable if it cannot
be expressed in the form C (q. , q.,) = C fq.) + C (9o)-
4.17
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appropriate unilateral taxation mechanism can also generate an eco-
nomically efficient allocation of resources when the cost functions of
the recipients of the external diseconomy are separable (i.e., if the
magnitude of the external cost which is imposed upon each recipic'nt by
the external diseconomy is independent of the level of output which is
produced by that recipient).
Consequently, it must be concluded that neither the imposition of
unilateral taxes or subsidies nor the imposition of bilateral taxes and/
or subsidies constitutes a universally effective technique for the inter-
nalization of externalities. Rather, in each externality situation, the
appropriate internalization mechanism must be determined on the basis
of, at least, such considerations as the cost conditions confronting each
recipient of the externality, the number of recipients who are involved
in the situation, and the extent to which the control of the externality
constitutes a pure public good for each of these recipients.
4. 1. 2. 3 The Problem of Multiple Local Optima
Baumol* demonstrates that the presence of sufficiently strong
external diseconomies will modify the production and consumption
opportunities of society so extensively that any particular taxation
mechanism (e.g., unilateral taxation of emitters of air pollution, bi-
lateral taxation of both emitters and recipients of air pollution, etc. )
can attain equilibrium at any one of several different economically
efficient allocations of resources. However, only one of these alloca-
tions of resources will constitute the socially most desirable allocation
which can be produced by that taxation mechanism. Moreover, the
determination of this socially most desirable allocation of resources
requires not only the identification of those allocations of resources
for which the first and second order conditions for the maximization
of social welfare are satisfied, but also the determination of the partic-
ular element of this set of potentially optimal allocations which actually
provides the highest attainable level of social welfare. Consequently,
the specification of the socially most desirable allocation of resources
requires detailed knowledge of both the incremental social costs and
*Baumol (4), pp. 313-320.
4. 18
-------
benefits which are attributable to any particular change in the rate of
production of an external diseconomy and the total social costs and
benefits which are associated with any particular rate of production of
this externality. In general, it is impracticable to obtain this detailed
knowledge. Thus, although it is conceptually possible to structure
virtually any taxation mechanism in a manner which will induce (he
attainment of any desired allocation of resources at equilibrium, infor-
mation limitations generally preclude the a priori specification of tue
precise structure of any particular taxation mechanism which will
induce the attainment of the socially most desirable allocation of
resources. Moreover, the existence of several locally optimal alloca-
tions of resources clearly implies that it'is inappropriate to rely upon
iterative procedures which systematically adjust the structure of this
taxation mechanism to achieve this objective, since it is impossible to
guarantee that any adjustment process will produce convergence to the
socially most desirable allocation of resources rather than to some
locally optimal resource allocation.
In this situation, Baumol recommends that society should specify
a set of minimum standards of acceptability and, subsequently, seek to
develop a taxation and subsidy mechanism which is capable of attaining
these specified standards. Although the application of this recom-
mendation obviously will not normally produce the socially most de-
sirable, allocation of resources, it does have the virtue of guaranteeing
the provision of some socially acceptable allocation of resources and,
hence, of achieving an improvement in the allocation of resources
relative to that allocation which would have prevailed in the absence of
governmental intervention. For example, this recommendation might
be particularly applicable to the control of water pollution in a region
through which several rivers and streams flow. While the specification
of a comprehensive taxation mechanism which would induce the socially
optimal utilization of each of these water courses undoubtedly would
be impracticable, the establishment of a taxation system which achieves
a satisfactory level of water quality in each river and stream would be
administratively feasible and, probably, socially and economically
desirable.
This general approach to the resolution of externality problems
is also advocated by Dales*, who asserts that the stringent information
*Dales (25).
4. 19
-------
requirements of those taxation and subsidization mechanisms which
provide for the complete intcrnalization of externalities render these
mechanisms impossible to implement. Consequently, he concludes
that the best available strategy for the control of an externality consists
of the specification of a set of minimum standards of acceptability in
the production of this externality, the creation of that quantity of rights
to produce this externality which is consistent with these standards, and
the establishment of a market in which these rights can be exchanged.
Obviously, the prices which are established for these rights in
this market are functionally equivalent to Baumol's taxes and subsidies
as incentives for the attainment of the specified standards. Thus, the
relative desirability of adopting Dale's exchange strategy rather than
Baumol's taxation and subsidization strategy in any particular exter-
nality situation can be determined primarily on the basis of a compari-
son o(f the feasibility and cost of defining, policing, exchanging, and
enforcing rights to produce the external diseconomy with the feasibility
and cost of establishing, administering, and enforcing taxes or subsi-
dies applied to this production.
4. 1.2.4 Information Requirements
Even in those externality situations in which external diseconomies
are not sufficiently strong to cause the existence of several locally
optimal allocations of resources within the feasible set of production
and consumption opportunities of a society, it is possible that taxation
and subsidization mechanisms will constitute unsatisfactory instruments
to induce the attainment of the socially most desirable resource alloca-
tion. In particular, Davis and Whinston* demonstrate that the imple-
mentation of a taxation or subsidization mechanism for the internali-
zation of an externality may impose upon the administrator of this
mechanism information requirements which are so demanding as to
preclude the adoption of the mechanism. Specifically, they prove that
the volume of information which must be collected and analyzed to
implement a taxation or subsidization mechanism may be sufficient to
permit the administrator of the mechanism to determine directly the
optimal resource utilization decision for each of the resource owners
who is involved in the externality situation. When this condition arises,
*Davis and Whinston (31) and Davis and Whinston (32).
4.20
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the direct spc cification of the optimal allocation of. resources (i. e. ,
the direct governmental regulation of the externality situation) will be
at least as tractable as the calculation of the appropriate tax and sub-
sidy schedules.1- Moreover, this potential dominance of regulation over
taxation and subsidization in the internalization of externalities is likely
to prevail even in externality situations in which it is possible to apply
an iterative procedure which circumvents most of these information
collection and analysis requirements for the determination of appro-
priate taxes and subsidies,** since the implementation and operation
of a procedure of this type is not costless.
Yet, it is also conceivable that, in some instances, both direct
governmental regulation and the implementation of taxation and sub-
sidization mechanisms will be less effective than some other internali-
zation mechanism in promoting the attainment of the socially optimal
allocation of resources. In particular, Davis and Whinston assert that
in many externality situations the optimal public policy might be to
permit the merger of the resource owners who are involved in the
situation until those external effects which can be internalized have been
eliminated and, hence, the "natural unit" for decision-making has
been achieved.*** Thus, clearly, the substantial differences in Ihe
cost of obtaining relevant information in different externality situations
render it impossible to assert that the adoption of any particular in-
ternalization mechanism will unambiguously be socially most desirable
in all externality situations.
4.1.2.5 Uncertainty
If the development of an intc rnalization mechanism -which is
capable of inducing the attainment of the socially optimal allocation of
resources is to be even theoretically possible, it is necessary (hat
the administrator of this mechanism must be able to identify the pro-
duction opportunities of the society with certainty. However, many of
*This conclusion can be asserted with greater conviction if the
cost functions of the resource owners who are involved in the externality
situation are non-separable than if these cost functions are separable.
See Davis and Whinslon (31).
**.An iterative procedure which can perform this function in at
least some externality situations is described in Davis and Whinston
(32), pp. 312-216.
***Davis and Whinston (31), p. 256 and p. 261.
4.21
-------
the characteristics of the environment which influence most significantly
the specification of the appropriate structure of any intcrnalizalion
mechanism which attempts to achieve this resource allocalion arc in-
herently stochastic in nature. Rainfall and, hence, stream flows
exhibit both seasonal and annual variability. Similarly, the incidence
of atmospheric inversions varies over time.* Consequently, any
intcrnalization mechanism which strives to exert optimal control over
the production of an externality which embodies stochastic characteris-
tics must be dynamically responsive to these stochastic environmental
conditions. Thus, for example, if a taxation mechanism is to achieve
the socially optimal generation of air pollution, the rate at which this
tax is imposed upon the emitters of pollution must be increased as the
marginal damages which are attributable to air pollution increase when
an atmospheric inversion occurs; while if this saine objective is to be
attained through the application of performance standards to the genera-
tion of air pollution by these emitters, the restrictiveness of these
standards must be increased in the event of an atmospheric inversion.
Obviously, the successful implementation of any dynamically
responsive inte rnalization mechanism requires both accurate predic-
tions of those stochastic conditions which influence the optimal struc-
ture of this mechanism and perfect knowledge of the effect of these
stochastic environmental conditions upon the value of the marginal
damages which are attributable to the externality whose control is
sought. Unfortunately, these requirements commonly fail to be fulfilled
in those externality situations which are generally considered to con-
stitute valid areas of governmental intervention. The general inability
of physical scientists to forecast accurately future environmental con-
ditions is well documented. In addition, their knowledge of the manner
in which biological and chemical processes translate changes in basic
environmental conditions into impacts which affect the production and
consumption opportunities of society is surprisingly limited. Finally,
the ability of social scientists to evaluate the value of the marginal
damages which are incurred by society as a result of these impacts is
severely circumscribed, both theoretically and in practice. **
The implications of these uncertainties for the development of
internalization mechanisms is intensified by the realization that environ-
mental systems can be imperfectly reversible. Toxic substances which
"Roberts (93), p. 14 and p. 21.
-Roberts (93), pp. 20-28.
4.22
-------
have been introduced into the environment may deteriorate extremely
slowly and may be removable only imperfectly and at great cost.
Reclamation of stripmined land is, at best, partial and, frequently,
extremely expensive. The existence of limitations upon the reversibili-
ty of natural systems reduces the social desirability of utilizing any
iterative technique to determine the optimal structure of any intcrnali-
zation mechanism, since it may be impossible to correct fully any
inappropriate adjustment which is generated by that technique. Con-
versely, it enhances the desirability of developing internalization
mechanisms which are ".-.designed to preserve options and avoid
risks. ";;= Therefore, in those externality situations in which either the
probability that an irreversible impact will be generated is high or the
anticipated consequences of any irreversible impacts which might be
generated arc especially adverse, it might be socially desirable to
attempt to internalize these externalities through the initiation of either
the direct governmental regulation of those activities which contribut-::
to the creation of the potentially irreversible impacts or (he imposition
upon these activities of standards which specify the maximum allowable
rate at which they may generate these externalities.
Yet, if either of these internalization mechanisms is adopted in
any particular situation, it is important to recognize that compliance
with its stipulations by those activities which are involved in the
situation will not be automatic. Consequently, to induce compliance
with the regulations or standards, some penalty must be imposed upon
any activity which fails to comply with their stipulations. In general,
the magnitude of this penalty should be relatively larger for the produc-
tion of impacts for which the probability of irreversibility is relatively
higher or the anticipated consequences of irreversible impacts are
relatively more adverse. Moreover, since, for any reasonable penalty
of a constant amount, there will exist instances in which some activi-
ties will rationally choose to violate these stipulations, it usually will
be desirable to attempt to restrict the extent to which the actual genera-
tion of adverse effects exceeds the administratively specified levels by
imposing upon those activities which violate any regulations or stan-
dards a positive marginal penalty for each unit by which the regulation
or standard is violated. Similarly, since normal regulation and stan-
dards provide no incentives for activities to generate adverse external
effects at rates which are lower than the rates which are specified in
^Roberts (93), p. 22.
4.23
-------
these regulations or standards, it might be socially desirable in many
instances to attempt to induce the adoption of this behavior pattern by
imposing a tax of a specified amount for each unit of the external effect
which is produced up to the stipulated Level (or by providing a subsidy
of a specified amount for each unit of the external effect which is not
produced relative to the stipulated level) in addition to any penalty
which is imposed for violation of the regulation or standard. Thus, in
summary, in externality situations which may involve the production
of irreversible impacts, the best available internalization mechanism
may consist of a positive marginal tax or subsidy applied to each unit
of the externality which is produced up to a stipulated level, a substan-
tial constant penalty for any production of the externality in excess of
this stipulated level, and a positive marginal penalty applied to each
unit of the externality which is produced in excess of the stipulated
level. *
4.1.3 S yn th c s i s
The numerous and varied proposals which have been advanced
for the adoption of particular internalization mechanisms in particular
externality situations lead inevitably to the conclusion that there exists
no single mechanism for the internalization of externalities which uni-
formly constitutes the socially most desirable internalization mecha-
nism in all externality situations. Rather, the appropriate internaliza-
tion mechanism for any particular externality situation can be deter-
mined only after a careful evaluation of the relative strengths and
weaknesses of each available alternative internalization mechanism
in that situation has been completed. For, as Coase asserts:
solutions have costs and there is no reason
to suppose that government regulation is called
for simply because the problem is not well handled
by the market or the firm. Satisfactory views on
policy can only come from a patient study of how,
in practice, the market, firms and governments
handle the problem of harmful effects. "**
*The use of mixed internalization mechanisms of this type are
advocated in Roberts (93), pp. 74-79.
**Coase (19), p. 17.
4.24
-------
Yet, Davis and Kamien offer a specific recommendation concern-
ing the appropriate method of performing this study. In particular,
they assert:
"The tools of cost-benefit analysis appear to provide
the proper perspective. In a given situation, the
policymaker should consider the problem and imagine
the application of each of the alternative approaches
to it. The principle of selection is simple. Each
measure of policy (including that of doing nothing)
will have costs and benefits associated with it. The
policymaker should select that measure for imple-
mentation which produces the greatest net benefits.*
Nevertheless, since the costs and benefits which are attributable to the
adoption of any particular internalization mechanism differ both among
resource owners and among externality situations, it is reasonable
that a variety of different internalization mechanisms should exist
simultaneously.
4. 2 Public Goods
A pure public good is a good which is consumed collectively by
all members of society in the sense that the consumption of the good
by one individual does not reduce the satisfaction which can be obtained
by any other individual from his consumption of the good. Since each
unit of a pure public good can be consumed simultaneously by all mem-
bers of society, the marginal value to society of any particular unit of
this good will be equal to the sum of the marginal values which arc
attached to this unit of the good by all members of society. Therefore,
to attain economic efficiency in the provision of a pure public good,
society should expand its production of this good to that level of output
at which this sum is equal to the marginal cost which must be incurred
by society in producing an additional unit of the good. This societal
decision rule can be expressed mathematically as:
*Davis and Kamien (28), p. 86.
4.25
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MRS] = MRT.
where MRS. = the marginal value which is attached
to pure public good i by individual j (i. e. ,
individual j's marginal rate of substitution
for pure public good i);
MRT. = the marginal cost to society of pure
public good i (i.e., the marginal rate of
transformation of pure public good i); and
s = the total number of members of society. *
Unless the production function of society exhibits increasing returns
to scale, satisfaction of this condition will guarantee that society will
produce each unit of the pure public good whose marginal value to
society equals or exceeds its marginal cost to society and will refrain
from producing each unit of the good whose marginal cost to society
exceeds its marginal value to society. Thus, no modification of the
rate of production of this good will provide incremental benefits to
society which exceed the marginal cost to society of performing the
modification.
Having determined the optimal rate of production of a pure public
gooc', it is necessary to specify the optimal pattern of consumption of
this good by the various members of society. The opportunity to con-
sume any existing quantity of this good can be granted to additional
members of society without affecting the satisfaction which is obtained
from its consumption by those members of society who initially have
been consuming the good. Therefore, any allocative mechanism which
excludes any individual member of society from the consumption of any
individual unit of the good will be economically inefficient because it will
reduce the satisfaction of that member of society who is excluded from
consumption without increasing the satisfaction of any other member
of society. Even if it is practicable to exclude some members of society
*See Samuclson (102) and Samuelson (99) for a mathcmatic deriva-
tion and a graphical derivation, respectively, of this optimality con-
dition.
4.26
-------
from the consumption of some units of a pure public good, performing
this exclusion will be socially undesirable because the attainment of
economic efficiency requires that all members of society must be
granted free access to the consumption of all units of that good. There-
fore, the socially optimal price which should be charged for the right
to consume a pure public good is zero.
However, if a price of zero is charged for the right to consume
each unit of a pure public good, some mechanism other than the price
system must be employed to finance the provision of this good. More-
over, if the financing mechanism which ultimately is adopted is to
promote unambiguously the attainment of economic efficiency, this
mechanism must guarantee that each citizen's contribution to defray
the cost of providing the pure public good does not exceed the value of
the total benefits obtained by that citizen from his consumption of the
good. Unless this condition is satisfied, one or more members of
society will suffer a decrease in their satisfaction as a result of the
provision of the pure public good. Yet, at the socially optimal level
of total production of this good, the value of the marginal benefit which
is obtained by society from each unit of the good which is provided
must equal or exceed the marginal cost which is incurred by society in
providing that unit of the good. Therefore, the value of the total bene-
fit which is obtained by society from the provision of the socially opti-
mal quantity of the good must equal or exceed the total cost which is
incurred by society in providing this quantity of the good. Consequently,
there must exist at least one financing mechanism for which this dis-
tributional provision will be fulfilled. In fact, it generally will be
possible to satisfy this condition with an infinite number of alternative
financing mechanisms which are differentiated solely by the relative
magnitudes of the values of the net benefits which are obtained by the
various members of society.
4.2. 1 The Inefficiency of Decentralized
Provision of Public Goods
Since the consumption of a pure public good by any individual docs
not diminish the satisfaction which other individuals can obtain from
their consumption of the good and since it is economically inefficient,
if not impossible, to exclude any individual from the consumption of
the good, it is theoretically impossible for a decentralized market
mechanism to induce the economically efficient provision of a pure
public good. In particular, when these circumstances prevail, each
citizen's consumption of the existing quantity of the good will be totally
4.27
-------
independent of the magnitude of his contribution to the financing of the
cost of providing the good. Moreover, if the population of the society
is sufficiently large that the value of the benefits which any particular
citizen obtains from his consumption of this good represents an insignifi-
cant portion of the value of the total benefits which are obtained by all
members of society from their consumption of the good, a decision by
any particular citizen to refrain to any extent from contributing toward
the provision of the good will have no noticeable effect upon either the
total quantity of the good which is available for consumption or, con-
sequently, the total satisfaction which this citizen obtains from his
consumption of the good. Therefore, it will be individually rational for
each member of society to volunteer to contribute toward the provision
of any particular quantity of a pure public good an amount of income
which is substantially less than the maximum amount which he ulti-
mately would be willing to surrender in exchange for the provision of
that quantity of the good. Yet, if each member of society adopts this
individually rational behavior pattern, the cumulative result of these
independent, decentralized actions will be the provision of an economi-
cally inefficient ly small quantity of the good.
Moreover, if the society initially achieves an equilibrium in which
an inefficiently small quantity of a pure public good is produced, any
individual citizen who independently attempts to rectify this inefficiency
will be required to finance the entire marginal cost of any incremental
production of the good which he provides; while he will obtain only an
insignificant portion of the value of the marginal benefits which are ob-
tained by all members of society as a result of this expansion of pro-
duction. Consequently, it is extremely unlikely that independent,
decentralized action will successfully increase the production of any
pure public good from any inefficiently low initial equilibrium level to
the economically efficient level of output.
Therefore, it can reasonably be concluded that independent,
decentrali/.ed decision-making is generally incapable of achieving the
economically efficient provision of a pure public good. Instead, it is
virtually inevitable that it will be necessary to rely upon some central-
ized resource allocation mechanism to promote the production of the
most socially desirable quantity of any good of this type.
4.2.2 The Centralized Provision of Public Goods
Any system of lump-sum taxes which requires each member of
society to contribute toward the provision of a pure public good an
4.28
-------
amount of income or wealth which docs not exceed the value of the
benefits which this individual obtains from his consumption of that good
will constitute an economically efficient mechanism to finance the pro-
vision of the good. Moreover, only if the value of the total benefits
which are obtained by all members of society from their consumption
of the good is identically equal to the total cost to society of providing
this good will there exist only one system of lump-sum taxes which
will meet these specifications. Thus, in general, if the provision of a
pure public good is potentially socially desirable (i.e. , if total societal
costs do not exceed the value of total societal benefits), there will
exist an infinite number of economically efficient systems of lump-sum
taxes to finance the provision of this good.
Unfortunately, the accurate specification of any of these economi-
cally efficient taxation systems requires detailed knowledge of the will-
ingness of each member of society to pay for the provision of the good.
In the absence of gove rnmental omniscience, this specific information
can only be obtained by consulting those members of society. However,
these individuals almost invariably will realize that their revelation of
this knowledge can and will be used as the basis for the imposition of
a tax upon them. Therefore, they rationally will understate their
willingness to pay for the provision of (he good, since; they will be able
to consume the entire available quantity of the good regardless of the
extent to which they contribute to the financing of the cost of its pro-
vision.
Consequently, the government will be obliged to rely upon imper-
fect estimates of the willingness of these citizens to pay for the pro-
vision of the public good as the primary basis for the development of
any system of lump-sum taxes. Hence, in general, the tax systems
which actually are implemented to finance the provision of pure public
goods will not constitute economically efficient mechanisms for achiev-
ing this objective. The ultimate consequences of this theoretical im-
possibility of obtaining accurate information concerning l.he preferences
of each member of society relative to the provision of a pure public
good include not only the inability of government to identify an econo-
mically efficient taxation mechanism to finance the provision of this
good, but also the incapacity of the public sector to determine the most
socially desirable quantity of the good to provide.
These theoretical difficulties are compounded by the practical
problem that the taxation mechanisms which actually are available for
implementation by the government do not include the neutral lump-sum
4.29
-------
taxes which are required for the attainment of economic efficiency.
Although, in theory, it is possible to develop a pure income tax or a
pure wealth tax which is functionally equivalent to any particular lump-
sum tax, the available income and wealth taxes which actually can be
employed to finance the provision of public services incorporate varia-
ble marginal tax rates and multiple exemptions from taxation which
inevitably distort the allocation of resources which is achieved at equi-
librium.
Thus, although the conceptual specification of the conditions
which must be satisfied to guarantee the attainment of economic efficien-
cy in the provision ot a pure public good Is a relatively simple exer-
cise, the development and implementation of mechanisms to promote
the fulfillment of these conditions encounter numerous practical and
theoretical difficulties. Yet, somewhat paradoxically, the failure of
the attributes of most of the goods and services which actually are pro-
vided by the public sector to conform perfectly to the attributes which
are characteristic of pure public goods may, in many instances, en-
hance the ability of the government to promote the attainment of eco-
nomic efficiency in the provision of those goods and services which it
actually provides.
4.2.3 Exclusion and the Centralized
Provision of Public Goods
Recognizing the serious theoretical and practical difficulties
which hinder, if not preclude, the fulfillment of the theoretical condi-
tions for the attainment of economic efficiency in the provision and
financing of public goods, numerous res ear che rs* have asserted that
in many of those situations in which it is possible to some extent to
exclude specific members of society from the consumption of a public
good, it may be socially desirable to charge a positive price for the
consumption of this good. Admittedly, the adoption of a pricing policy
of this type for any public good will restrict society to the attainment
of an economically inefficient pattern of consumption of the good at
equilibrium. Specifically, this pricing policy will exclude some mem-
bers of society from the consumption of some units of this good; and,
theoretically, it is economically inefficient to exclude any member of
*The exchange of ideas contained in Buchanan (14), Minasian (75),
Minasian (76), Samuelson (98), Samuelson (100), and Samuclson (101),
comprises a thorough analysis of this assertion. In addition, McKean
and Minasian (71) provides an excellent summary of this issue.
4. 30
-------
society from the consumption of any unit of a public good because this
exclusion will deny to that individual a net benefit whose provision im-
poses no cost upon any other member of society. However, this pricing
policy also has the offsetting virtue that it directly provides objective
information concerning the minimum amount of income which members
of society are willing to surrender in exchange for the right to consume
the public good. This information, which clearly reflects the cost of
employing society's scarce resources in alternative uses, constitutes
a valuable input into the determination of the most socially desirable
quantity of the public good for the government to provide. Thus, shift-
ing from a policy of permitting free access to a public good to all mem-
bers of society to a policy of charging each member of society a posi-
tive price for the consumption of this good can produce an increase in
the extent to which economic efficiency is attained in the production of
the good, in exchange for a decrease in the extent to which economic
efficiency is attained in the consumption of the good.
However, this shift in policy will be effective in producing these
effects only if it is possible to exclude from the consumption of the
good those individuals who refuse to pay the price which is charged for
the good. Yet, for a surprisingly large number of public goods, it is
technologically possible to enforce some degree of exclusion from the
consumption of the good upon any particular member of society. For
example, even in a community which experiences widespread air
pollution, it is possible to exclude some residents from the benefits of
an air pollution control program merely by imposing less restrictive
controls upon emitters of air pollution who are located near to these
residents than the controls which are imposed upon emitters who are
located at a substantial distance from these residents. Thus, even
within the context of achieving a specified reduction in the total emis-
sion of air pollutants, it is possible for the government to exercise
substantial control over the distribution of the benefits from this reduc-
tion in air pollution among the various residents of the community.
However, a demonstration of the technological feasibility of ex-
cluding certain individuals from the consumption of a public good does
not constitute a demonstration of the social desirability of adopting a
pricing policy which is capable of performing this exclusion. The costs
of developing, administering, and enforcing this pricing policy may
greatly exceed the net benefits which are obtained by society from the
impacts which this pricing policy exerts upon the provision and con-
sumption of this public good.
4.31
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4. 2. 4 Synthesis
Charging a positive price for the consumption of a public good
necessarily restrains society from the attainment of economic efficiency
in the consumption of goods and services. Moreover, the design and
implementation of a mechanism to administer .a positive pricing policy
may require the incurring of substantial cost by society. Conversely,
the charging of a zero price for the consumption of a public good virtual-
ly precludes the attainment of economic efficiency in the production of
that good, in particular, and all goods and services, in general. Con-
sequently, for any public good, the determination of the social desir-
ability of charging any particular price for the consumption of the good
should be based upon a thorough comparison of the costs which will be
incurred by society and the benefits which will be obtained by society
if this pricing policy is adopted.
4. 3 Increasing Returns to Scale
A production process exhibits increasing returns to scale if equal
proportional increases in the utilization rates of all inputs into this
process generate a greater proportional increase in the production rate
of the output of the process. Thus, if the firm which operates this pro-
duction process purchases its inputs in perfectly competitive markets
at constant prices (or, at least, if input prices do not increase suf-
ficiently rapidly as the firm expands its production to more than offset
the increasing returns to scale), any particular proportional increase in
production cost will generate a greater proportional increase in output
and, hence, the average cost of producing this output will decrease as
output expands. Moreover, since marginal cost must be less than
average cost whenever average cost is decreasing, marginal cost must
be less than average cost whenever increasing returns to scale prevail
in a production process. These relationships are represented graphi-
cally in Figure 4. 1, which illustrates the cost conditions which confront
a firm whose production process exhibits increasing returns to scale
for all feasible rates of production. In this diagram, the curve labelled
AC represents the average cost which the firm must incur at each rate
of production; while the curve labelled MC describes the marginal cost
which is absorbed by the firm at each level of output. It is generally
asserted that cost conditions of this type will exist in any enterprise
whose production process requires both the incurring of substantial
fixed costs before any output can be produced and, subsequently, the
4.32
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Cost per Unit
of Output
to
LO
AC
AC
MC
Figure 4. 1
Cost Functions Attributable to Increasing
Returns to Scale
Output per
Unit of Time
-------
absorbing of only insignificant incremental cost as output is expanded.
Thus, the cost curves in Figure 4. 1 might reasonably well describe
the cost conditions which confront the electricity generation industry,
the natural gas industry, urban mass transit, or, more importantly
for the purposes of this report, the provisions of municipal water and
sewerage services.
4. 3. 1 The Impossibility of Perfect Competition
Whenever cost conditions of this type confront all of the firms in
a perfectly competitive industry throughout all relevant ranges of out-
put, it is theoretically impossible for perfect competition to prevail
in this industry when equilibrium is attained. When perfectly competi-
tive market conditions exist in an industry, each firm in that industry
will be unable to exert any noticeable influence over the prevailing
market price solely on the basis of its own output decisions. Therefore,
each of- these firms will rationally consider this price to be a constant.
Then, in attempting to maximize its profits, each firm will choose to
produce its output at that rate for which price is equal to marginal cost.
This situation is illustrated in Figure 4.2, where the firm initially
chooses to produce the output Q when the prevailing market price is
Po. However, when increasing returns to scale exist for the firm, the
average cost of production, AC , will exceed the prevailing market
price (i.e. , the average revenue from production) at this output level;
and, hence, the firm will incur a loss of (AC - P ) on every unit of
output which it produces. Moreover, for each unit of output which the
firm produces in excess of Q , price will exceed marginal cost. Thus,
the firm can decrease its losses by expanding its output indefinitely
beyond Q . In fact, at production rates in excess of Q , the firm can
actually earn positive profits. However, if each firm in the industry
adopts this production strategy the prevailing market price will decline
and, once again, all firms in the industry will be incurring losses.
Conceivably, this process could continue until each firm in the industry
is producing an infinite level of output at a market price of zero. More
realistically, however, as industry output expands and market price
declines, increasingly large numbers of firms will choose to leave the
industry until, at the limit, only one firm -- a natural monopoly --
remains. Moreover, this outcome constitutes a necessary condition
for the attainment of an economically efficient allocation of resources
in any industry in which increasing returns to scale exist at equilibrium.
For any level of output, a higher average cost of production will be
incurred by the industry if more than one firm produces this output
than if this total output is produced solely by one firm (e. g. , in the
4.34
-------
Cost per Unit
of Output
AC
AC -A
£>.
OJ
Figure 4.2 Perfect Competition Under Increasing
Returns to Scale
Output per
Unit of Time
-------
context of Figure 4.2, the average cost of production in the industry
will be lower if one firm produces the output Q than if two firms each
produce the output Q /2). Thus, society will be required to sacrifice
more alternative goods and services to obtain any particular level of
output in a naturally monopolistic industry if it attempts to maintain
some degree of competition in this industry instead of permitting only
one firm to produce this output at equilibrium.
4. 3. 2 The Inefficiency of Unregulated Monopoly
Yet, if society decides to permit a single firm to monopolize the
production of this output, it generally will be socially desirable for the
government to initiate policies which will control the tendencies of an
unregulated monopolist to allocate resources in an economically inef-
ficient manner. Since a monopolist directly confronts the actual mar-
ket demand curve for his output, he can be expected to both recognize
and take advantage of the effect which his production decisions have on
the market price which prevails for his product. Therefore, if the
monopolist desires to maximize profits, he will choose to produce the
restricted output level for which marginal revenue is equal to marginal
cost instead of the economically efficient output level for which price
is equal to marginal cost. This situation is illustrated in Figure 4. 3,
where the curve labelled D represents the market demand curve for
the industry's output and the curve labelled MR depicts the marginal
revenue curve which is associated with this demand curve. Confronted
with these market opportunities, an unregulated profit-maximizing
monopolist will choose to produce the output Q , for which the market
will pay a price P . However, as is indicated by the relative heights
of the demand curve and the marginal cost curve, at this level of out-
put some member or members of society are willing to pay substan-
tially more for an additional unit of output than the cost which must be
incurred by society in producing this unit of output. Consequently, it
is socially desirable to produce at least one more unit of this product.
In addition, if no income effects influence the demand for this product,
the social desirability of expanding production will continue to exist
until output has increased to the level Q, at which the maximum
amount that some individual is willing to pay for an additional unit of
the product (i.e., the height of the demand curve) is identically equal
to the cost to society or producing this unit {i.e., the height of the
4. 36
-------
Cost per
Unit of Out-
put
p i ^ ^ :
m
LO
-v)
AC
Output per
Unit of Time
Figure 4. 3 Unregulated Monopoly Under Increasing
Returns to Scale
-------
marginal cost curve). Thus, without regulation, a profit-maximizing
monopolist can be expected to produce an economically inefficiently
low level of output for which he receives an economically inefficiently
high price.
4. 3. 3 Optimal Regulation of Natural Monopoly
Theoretically, the socially optimal public policy to correct this
misallocation of resources consists of, first, requiring the natural
monopolist to produce as many units of output as the members of
society are willing to purchase at the price which is determined by the
intersection of the market demand curve and the monopolist's marginal
cost curve (P#) and, then, paying to the monopolist a subsidy which
will fully compensate him for the loss which he would have incurred
if he had sold the output Q* at the price P# in the absence of any govern-
mental action. This policy is illustrated in Figure 4.4, where the
shaded area indicates the magnitude of the subsidy which must be pro-
vided to the natural monopolist. Moreover, if the implementation of
this policy is to promote the attainment of economic efficiency (i.e.,
to increase the satisfaction of at least one member of society without
decreasing the satisfaction of any other member of socictv), this sub-
sidy must be financed through a system of lump-sum taxes which col-
lects from each consumer of this product an amount of income which
does not exceed the difference between the value of the benefit which
he obtains from his consumption of the product and the amount of in-
come which he has been required to pay to obtain the units of output
which he consumes (i. e. , an amount of income which does not exceed
his consumer's surplus from the consumption of the product). If a
subsidy of this type cannot be implemented, the total benefits which
society obtains from the production and consumption of this product
must be less than the total cost which society incurs in producing the
product and, hence, the product should not be produced. Thus, only
if the subsidy can be financed in an economically efficient manner
through the imposition of lump-sum taxes upon the consumers of the
product will the production of this product constitute a socially desir-
able activity.
4. 3. 4 Practical Regulation of Natural Monopoly
It is relatively simple to specify the theoretically optimal taxa-
tion policy to finance the provision of an economically efficient subsidy
to a natural monopoly. However, the implementation of a specific
system of lump-sum taxes which is consistent with this optimal policy
4.38
-------
Cost per
Unit of
Output
Subsidy
U>
-JD
AC*
P* _y<_
Figure 4. 4 Optimally Regulated Monopoly Under
Increasing Returns to Scale
Output per
Unit of Time
-------
requires detailed knowledge of the willingness of the consumers of the
output of the natural monopoly to pay for this output. Yet, in the ab-
sence of omniscience, governmental regulatory agencies will be unable
to obtain this information without consulting these consumers. More-
over, recognizing that the revelation of this knowledge can and will be
utilized as the basis for the imposition of a tax upon them, these con-
sumers rationally will be unwilling to provide this information to the
regulatory agencies. Consequently, these agencies will be forced to
rely upon imperfect forecasts of the willingness of these consumers to
pay for the output of the natural monopoly as the primary basis for the
development of their taxation policies. Hence, these policies will not
necessarily constitute economically efficient mechanisms for the regu-
lation of natural monopolies. In addition, the taxation mechanisms
which are actually available for implementation by the regulatory agen-
cies do not include the neutral lump-sum taxes which are required for
the attainment of economic efficiency. Rather, they consist of income
and wealth taxes with variable marginal tax rates whose application
inevitably distorts the allocation of resources which is achieved at
equilibrium.* Thus, the possibility arises that, in practice, a theo-
retically inferior policy for the regulation of natural monopolies will
generate an allocation of resources at equilibrium which is more
socially desirable than the equilibrium resource allocation which is
produced by the theoretically optimal policy.
In particular, it is conceivable that, in some instances, the
standard regulatory policy of requiring the natural monopolist to pro-
duce as many units of output as the members of society are willing to
purchase at the price which is determined by the intersection of the
market demand curve and the monopolist's average cost curve will be
socially superior to the theoretically optimal regulatory policy. This
standard regulatory policy is illustrated in Figure 4. 5, where the price
established by the regulatory agency is labelled P and the quantity
which the natural monopolist produces at this price is labelled Q .
This policy does have the virtue of guaranteeing the natural monopolist
a normal return on his investment (i.e., zero economic profits) with-
out providing any direct subsidy to him. However, it also has the weak-
ness of producing an economically inefficient allocation of resources
*For a thorough discussion of these practical difficulties in
regulation, see Vickrcy (112).
4.40
-------
Cost per
Unit of
Output
P*
Output per
Unit of Time
Figure 4. 5 Standard Regulation of Monopoly Under
Increasing Returns to Scale
-------
at equilibrium since, at this equilibrium, price exceeds marginal cost
and, hence, output can be expanded at a cost to society which is less
than the value of the benefits which are obtained by the consumers of
the additional output. In addition, the implementation of this policy
incorporates data manipulation problems, especially with respect to
the measurement and allocation of elements of fixed cost, which almost
unavoidably cause the price which actually is established by the regu-
latory agency to deviate from the price which corresponds to the inter-
section of the market demand curve and the natural monopolist's
average cost curve. Thus, this standard regulatory policy will not be
uniformly most socially desirable in all situations which are character-
ized by increasing returns to scale.
Recognizing these weaknesses of both the theoretically optimal
regulatory policy and the standard regulatory policy, Coase* suggests
that in many natural monopoly situations socially superior allocations
of resources will be achieved if multi-part pricing policies are estab-
lished. In particular, Coase recommends that each consumer of the
output of a natural monopoly should be required to pay at least a. two-
part price in which the first part is independent of the quantity of out-
put which he purchases and reflects the direct cost of providing any
level of service to him and the second part is directly dependent upon
the quantity of output which he purchases and reflects the marginal
cost, of supplying an additional unit of output to him. For example, in
the context of the provision of municipal water and sewerage service,
an appropriate two-part pricing mechanism would consist of both a
charge for connection to the municipal water and sewerage system
which reflects the direct cost of providing this connection and a charge
for each unit of water or sewerage service utilized by the consumer
which reflects the marginal cost of providing this water or sewerage
service. If the charge for connection to the system is set corrently,
it should impose higher costs upon those potential development sites
to which it is relatively expensive to provide water and sewerage ser-
vice (i.e. , relatively remote sites) than upon those potential develop-
ment sites which are relatively inexpensive to serve. A connection
charge of this type should encourage the development of land use pat-
terns which economize on the use of resources in the provision of
water and sewerage services. In addition, to the extent that the costs
*Coase (20).
4.42
-------
of providing water and sewerage services arc positively correlated
with the cost of providing water and sewerage service, this two-part
pricing policy should encourage the development of land use patterns
which economize on the use of resources in the provision of these other
municipal services. Moreover, to the extent that the two component
charges in this policy are designed to recover the total direct cost of
providing the naturally monopolistic output, the ability of this policy
to generate revenues which are sufficient to recover this cost will con-
stitute a strong market test of the social desirability of producing this
output. No direct test of this type exists for the theoretically optimal
policy. However, the cost of developing and administering a multi-
part pricing policy may be substantial and the allocation of resources
which is achieved by this policy at equilibrium may be less socially
desirable that the resource allocation which is generated, in practice,
by the theoretically optimal policy. Therefore, it is impossible to
conclude a priori that multi-part pricing is ihe most socially desirable
policy for the regulation of natural monopoly in all situations.
4. 3. 5 Synthesis
It is impossible to conclude that any single public policy consti-
tutes the socially optimal policy for the regulation of all situations
which incorporate increasing returns to scale. Rather, in each situa-
tion it is necessary to compare the relative advantages and disadvantages
of all potentially applicable policies before selecting any specific policy
for implementation. Once again, cost-benefit analysis appears to pro-
vide the most appropriate framework within which to conduct this com-
parison and, subsequently, to choose that alternative policy which can
be expected to provide the greatest net benefit to society.
4. 4 Conclusion
The essence of economic theory is the analysis of tradeoffs. The
concepts presented in this chapter clearly demonstrate that this analy-
sis is applicable not only to the determination by the consumer of his
utility maximizing bundle of commodities or the specification by the
firm of its profit-maximizing combination of inputs and outputs, but
also to the selection by the government of the most socially desirable
set of policy instruments for the rectification of market situations
which involve externalities, public goods, or increasing returns (o
scale.
4. 43
-------
There exists no single public policy which is uniformly most
socially desirable in the control of any of these three types of market
failure. Rather, in any particular situation of any of these types, the
most socially desirable public policy can be determined only on the
basis of a careful comparison of the relative advantages and disadvan-
tages of the various alternative policies which actually are available
for adoption.
Nevertheless, there does exist a single analytical framework
which is universally appropriate for the comparison of the strengths
and weaknesses of alternative policies. This analytical framework is
cost-benefit analysis, in which, first, the costs and benefits associ-
ated with the adoption of each alternative policy are enumerated and
evaluated and, then, that policy which exhibits the greatest difference
between total benefits and total costs is recommended for implementa-
tion.
4.44
-------
5.0 AN EVALUATION OF THE POTENTIAL
SOCIAL DESIRABILITY OF ALTERNATIVE
LAND USE CONTROL MECHANISMS
Historically, the regulation of the use of private real property
in the United States has been performed primarily through the enact-
ment and implementation of muncipal zoning procedures, subdivision
regulations, building codes, and eminent domain condemnation proce-
dures. However, each of these mechanisms is restricted in its appli-
cation and limited in its effectiveness by numerous administrative,
economic, judicial, legal, and political p'roblems. •'•' Consequently,
these mechanisms do not constitute, either individually or in combina-
tion, socially ideal methods for the regulation of private real property.
Therefore, the possibility that some alternative regulatory poli-
cies might be capable of producing patterns of development which are
more socially desirable than the patterns of development which are
produced by these traditional regulatory mechanisms warrants investi-
gation. This chapter investigates this possibility with respect to seven
innovative and, as yet, relatively untried regulatory policies. In par-
ticular, this chapter evaluates the information requirements and infor-
mation retrieval considerations associated with each of these policies;
the potential inequities, abuses, and enforcement problems which arc
likely to arise with each of these policies; the legal constraints and
political considerations which might limit the applicability of each of
these policies; the expected impact of each of these policies upon land
use patterns; and the extent to which each of these policies promotes
the attainment of the socially optimal pattern of development. **
*See Chapter 3. 0 for a detailed discussion of these issues.
**The identification of the socially optimal pattern of development
in any community requires detailed knowledge of the social welfare
function of that community. However, since the obtaining of this
detailed knowledge inevitably is impracticable, it is generally impos-
sible to identify this pattern of development in any community. There-
fore, it is also impossible to determine the extent to which the pattern
of development which is produced by any policy deviates from the so-
cially optimal pattern of development. Nevertheless, so long as the
preferences of each member of society are weighted positively in any
community's social welfare function, it is possible to determine
whether any change in the pattern of development of the community
which is produced by any particular policy will unambiguously produce
5. 1
-------
Specifically, Section 5. 1 contains an evaluation of a policy of
ad valorem property taxation with tax rates conditional upon land use,
A policy requiring the payment of annual "externality" fees to the gov-
ernment by the owners of properties upon which external effects are
generated is assessed in Section 5.2. Next, Section 5.3 appraises a
policy providing for the transfer of a lump-sum payment for external-
ities whenever the permissible land use status of any property is
changed. A policy of convening public hearings to promote negotiated
settlements of externality problems among all individuals who are
affected by these problems is investigated in Section 5.4. Section 5. 5
evaluates a policy of publicly purchasing scenic or environmental ease-
ments. A policy encouraging the formation of landowner development
corporations is appraised in Section 5. 6. Then, Section 5. 1 assesses
a policy requiring the owners of new developments to pay the full addi-
tional cost of all expansions of public facilities which must be provided
to serve these new developments.
In Section 5. 8, the considerations which should be taken into
account in determining the most appropriate level of government to
implement any of these policies are enumerated. Finally, Section 5. 9
presents general conclusions and provides recommendations concern-
ing the potential social desirability of implementing any of these pro-
spective policies.
5. 1 Ad Valorem Taxation Conditional
Upon Land Use
An ad valorem tax is expressed in. terms of a percentage of the
sales price or market value of the item to which the tax is applied.
Thus, the property tax constitutes an ad valorem tax applied to the
value of land and improvements to land. This section investigates the
social desirability of establishing an additional ad valorem tax on real
an increase in social welfare. In particular, under these conditions,
if any policy produces a. change in the pattern of development of the
commvmity which increases the personal welfare of at least one indi-
vidual without decreasing the personal welfare of any other individual,
this change in the pattern of development will unambiguously increase
social welfare and, hence, will unambiguously promote the attainment
of social optimality.
5.2
-------
property which attempts to exercise optimal control over the genera-
tion of externalities between private land uses by applying different
ad valorem tax rates to the values of properties on which different
land uses are located.
For any taxation policy to be capable of exercising optimal con-
trol over the generation of externalities between private land uses, any
modification of the activity which is performed upon any parcel of land
must precipitate a change in the total tax bill imposed upon the owners
of this property which is equal in magnitude to the change in the
external costs incurred by all other members of society which results
from this modification of activity. If this condition is fulfilled by a
taxation policy, any property owner who is considering any modifica-
tion of the activity performed on his land will be compelled to recog-
nize and motivated to include appropriately in his decision-making the
external costs which his land use activities impose upon the remainder
of society. Specifically, he will be motivated to refrain from initiating
any modification of activity which will impose additional external costs
upon other members of society (and, hence, will precipitate an increase
in his total tax bill) in excess of the additional benefits which he will
obtain from this modification of activity. Similarly, he will be moti-
vated to adopt any modification of activity which will generate a reduc-
tion in the external costs which are incurred by the remainder of
society (and, hence, will provide a decrease in his total tax bill) in
excess of the decrease in total benefits which he absorbs as a result
of this modification of activity.
For a policy of ad valorem property taxation with tax rates con-
ditional upon land use to be potentially capable of producing these
results, it must be possible to define an exhaustive set of mutually
exclusive land use classifications such that, for each classification
which is delineated, the external costs which are attributable to the
pursuit upon any particular parcel of land of any activity which is in
conformity with the stipulations of the classification are strictly pro-
portional to the assessed value of the parcel. If a set of land use clas-
sifications which fulfills this requirement can be developed, it will be
possible to express the external cost which is attributable to the pursuit
of any land use activity upon any parcel of land as:
ECi = KJ AVi
where: ECj = the external cost attributable to the activity
performed upon parcel i,
5. 3
-------
K; = the external cost per dollar of assessed value
of any parcel which is attributable to the pur-
suit upon that parcel of any activity which is
in conformity with the stipulations of land use
classification j (j = 1, . . . , n), and
AVi = the assessed value of parcel i.
Then, if the activity which is performed upon parcel i is modified in
a manner such that land use classification j remains applicable to the
activity which is performed upon parcel i, the change in the external
costs attributable to the activity performed on parcel i, AECj, will be:
AECi = ECj - ECi = KJ AVJ - Kj AVj = Kj (AV{ - AVj)
where EC^ and AVi represent the values which prevail before the modi-
fication of activity, while ECi and AVj represent the values which exist
after this modification. Similarly, if the activity which is performed
upon parcel i is modified in a manner which causes a different land use
classification k to be applicable to the activity which is performed upon
this parcel, this change in external cost will be:
i - ECi = Kk Avi - Kj AVi
In either event, the imposition upon each property owner of an ad
valorem tax upon the assessed value of his property at the rate K;
(j = 1, . . . , n) when the activity pursued upon this property conforms
to the stipulations of land use classification j will cause this property
owner to absorb changes in his total tax bill which are identically equal
to any changes in external costs which are attributable to modifications
of the activity which is performed upon his property. These changes
in his total tax bill will induce each property owner to initiate each
modification of activity which will provide additional benefits to society
which exceed the incremental costs which will be incurred by society
in performing this modification and to refrain from initiating any mod-
ification of activity which will provide additional benefits to society
which are less than these incremental costs. Consequently, it can be
concluded that, if an acceptable set of land use classifications can be
identified, it is theoretically possible to develop a policy of ad valorem
property taxation with tax rates conditional upon land use which is
potentially capable of promoting the attainment of the socially optimal
pattern of land use.
5.4
-------
5. 1. 1 Expected Deviations
from Social Optimality
The theoretical possibility of attaining social optimality through
the application of a policy of ad valorem property taxation with tax
rates conditional upon land use depends crucially upon the specifica-
tion of an exhaustive set of mutually exclusive land use classifications
such that, for each classification which is delineated, the external
costs which are attributable to the pursuit upon any particular parcel
of land of any activity which conforms to the stipulations of the classi-
fication are strictly proportional to the assessed value of the parcel.
Superficially, although this assumption of strict proportionality is
obviously strong, it does not appear to be qualitatively unreasonable.
Since, in the absence of malicious behavior, a property owner will not
initiate a modification of the activity which he pursues on his property
which will cause an increase in the external costs which are incurred
by the remainder of society unless he expects that this modification of
activity will produce an increase in the return which he obtains from
his property, it appears reasonable to assume that any increase in the
external costs attributable to the use of a particular parcel of land will
be positively related to the returns which are earned by that parcel of
land.
Moreover, unless the increased returns which result from this
modification of activity are purely psychic returns which are valued
only by the present owner of the property, this increase in returns
should produce an increase in the market value of the property as
potential owners of the property increase the amount of income which
they are willing to offer in exchange for the property. Thus, if the
assessed value of the property increases as its market value increases,
it appears generally reasonable to conclude that any increase in the
external costs which are attributable to the activity which is performed
upon a parcel of land will be accompanied by an increase in the
assessed value of this parcel of land.
However, it cannot be concluded on the basis of this analysis that
any increase in the assessed value of any parcel of land will be accom-
panied by an increase in the external costs which are attributable to the
activity which is performed on this parcel. Rather, increases in the
assessed value of a parcel of land can occur in many situations which
involve no changes in the external costs which are attributable to the
activity performed on this parcel. In fact, in numerous instances
increases in the assessed values of properties will be associated with
decreases in the external costs which are imposed upon the remainder
of society by the activities pursued on these properties.
5.5
-------
For example, installing new siding on a residential property can
be expected to both increase the assessed value of the house and
decrease the external costs (or increase the external benefits) which
are obtained by the remainder of society from the appearance of this
house. Similarly, initiating runoff control procedures on an agricul-
tural property may both increase the productivity and, hence, the
assessed value of the property and reduce the external costs which are
borne by the remainder of society as a result of agricultural runoff.
Finally, the installation on industrial property of pollution control
equipment which has no adverse effect upon the production of the firm's
desired output will both increase the assessed value of the property (to
the extent that some portion of the cost of the pollution control equip-
ment can be recovered if the firm decides to discontinue using this
equipment) and reduce the external costs which are imposed upon the
remainder of society by the pollution generated by the firm's produc-
tion. In each of these situations, if the modification of land use activ-
ity which is undertaken does not precipitate a change in the property's
land use classification, the imposition of an ad valorem tax will unam-
biguously produce an increase in the property owner's total tax bill;
and this increase in his total tax bill will induce the property owner to
refrain from adopting the modification of activity. Hence, within any
land use classification which is established, the imposition of an ad
valorem tax may discourage some property owners from undertaking
some socially desirable actions to reduce the generation of adverse
external effects.
Moreover, although this problem can be ameliorated to some
extent by creating a more detailed structure of land use classifications
(e.g., by distinguishing between residential properties with new siding
and residential properties without new siding, between agricultural
properties with runoff control procedures and agricultural properties
without runoff control procedures, and between manufacturing proper-
ties with pollution control equipment and manufacturing properties
without pollution control equipment) and, then, applying different ad
valorem tax rates to each of these more detailed classifications, a
disincentive to adopt any strategy to control the generation of external
effects which does not appropriately decrease the assessed value of
property will remain with each of the land use classifications which are
ultimately delineated. Thus, conceivably, the theoretically optimal ad
valorem taxation policy might incorporate a land use classification
system which is so detailed that any modification of the activity which
is performed upon any parcel of land will precipitate a change in the
land use classification which is applicable to that parcel of land.
5.6
-------
Clearly, the requirement that a property owner must accurately iden-
tify and apply two different tax rates to evaluate any prospective modi-
fication of his land use activity would cause the social desirability of
implementing a policy of ad valorem property taxation with tax rates
conditional upon land use at this level of complexity to be extremely
dubious. Consequently, any practical policy of this type will almost
invariably have to embody a land use classification system which is
incapable of promoting the full attainment of the theoretically optimal
pattern of development.
5.1.2 Information Requirements and
Information Retrieval Considerations
The development of any policy of ad valorem property taxation
with tax rates conditional upon land use requires the delineation of an
acceptable system of land use classifications and the determination of
the appropriate ad valorem tax rate to employ with each of these clas-
sifications. To delineate an acceptable system of land use classifica-
tions, it is necessary, first, to identify mutually exclusive sets of
properties such that the ratio of the external costs which are attribut-
able to the activity which is performed upon each property within a
particular set to the assessed value of that property is reasonably con-
stant. Then, those attributes of properties which distinguish the prop-
erties in each of these sets from the properties assigned to the other
sets must be isolated. To perform these tasks, it is necessary to
obtain data which specify, for at least a representative sample of the
properties to which the policy will be applied, the assessed value of
each property in the sample, the attributes of this property which
might distinguish it from properties to which different land use classi-
fications are likely to be assigned, and the external costs which are
attributable to the activity which is performed on this property.
The data specifying the assessed value of each property in the
sample can be readily obtained from existing property tax records.
Similarly, a substantial amount of information concerning the attributes
of each of these properties can be obtained from existing land use and
municipal zoning records. Moreover, any additional information which
is desired concerning these attributes can be obtained merely by con-
ducting an inspection of the property. Thus, although the cost of col-
lecting these data may be high (especially if sophisticated instruments
are required to measure the intensity of a particular attribute), the
obtaining of information concerning the attributes of each property
should be technically feasible.
5.7
-------
However, unfortunately, obtaining reasonably reliable estimates
of the external costs which are attributable to the activity which is per-
formed upon any particular parcel of land is likely to be extremely dif-
ficult, if not impossible. Conceptually, the external cost which is
imposed upon any individual by the activity which is performed upon
any parcel of land can be measured as the maximum amount of income
which that individual would be willing to pay to avoid the adverse •
external effects which are generated by that activity. If the sole objec-
tive of this individual is the maximization of the profits which he earns
from his property, this maximum amount of income will be equal to
the difference between the profits which he will earn from his property
when no external effects are generated by the activity under considera-
tion and the profits which he will earn from, his property when the exist-
ing quantity of external effects are generated. In general, reasonable
estimates of this difference in profits should be obtainable from
observed market data. However, if the objective of the individual who
absorbs the external effects is the maximization of his satisfaction,
the estimation of this maximum amount of income requires detailed
knowledge of this individual's tastes and preferences -- knowledge
which he generally will have no motivation to divulge accurately to the
administrators of any government program.
In particular, to the extent that the individual perceives that he
will never be required to surrender the amount of income which he
indicates he would be willing to surrender, it will be rational for him
to overstate the amount of income that he would be willing to pay to
avoid any external effect in order to obtain more stringent restrictions
upon the generation of this external effect. Conversely, if the number
of individuals who absorb the external effect is sufficiently large that
control of the external effect assumes the properties of a public good
and if the individual perceives that he may be required to surrender
the amount of income which he indicates that he would be willing to
surrender, it will be rational for the individual to understate the
amount of income that he would be willing to pay to avoid the external
effect. Given the large number of potential contributors to the control
of the external effect, his success in avoiding the external effect will
be relatively insensitive to the amount which he contributes to its con-
trol. Thus, only when merely a few individuals are impacted by an
external effect and each of these individuals believes that he will be
required to surrender the amount of income which he indicates he
would be willing to surrender for the control of this effect is there any
reasonable expectation that an individual will provide an unbiased esti-
mate of the maximum amount of income which he would be willing to
5.8
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pay to avoid the external effect. Obviously, these conditions will actu-
ally be fulfilled in only a small percentage of the situations in which the
control of external effects might be socially desirable. Moreover,
perversely, these accurate revelations will occur in precisely those
situations in which the control of the external effect most nearly
assumes the properties of a private good and, hence, can be expected
to be performed through voluntary negotiation without any public inter-
vention. Consequently, the conclusion is unavoidable that, in those
situations where the attainment of social optimality without public inter-
vention is most unlikely, the obtaining of reasonably accurate estimates
of the external costs which arc attributable to the activity which is pur-
sued upon any particular parcel of land may be impossible.
Moreover, this conclusion can be stated with even greater con-
viction when the external effect which is absorbed by any individual is
generated by a variety of different activities which are performed on
several different parcels of land. In any situation of this type (e.g.,
the generation of air pollution or water pollution in an urban area), the
accurate estimation of the external costs which arc attributable to the
adverse external effects generated on any particular parcel of land will
require the determination of the portion of the external effects absorbed
by each other member of society which are attributable to the activity
performed upon that parcel of land. In many instances, this determi-
nation may be technically infeasible. Therefore, in any realistic situ-
ation, the estimates of external costs which will be obtainable for the
delineation of an acceptable system of land use classification will
necessarily be relatively crude.
Nevertheless, after the best attainable estimates of these
external costs have been developed and, subsequently, an acceptable
system of land use classifications has been specified, the best estimate
of the appropriate ad valorem tax rate to employ with each of these
classifications can be calculated as the quotient of the sum of the
external costs which are attributable to the activities which are per-
formed upon all of the properties in the sample to which this classifi-
cation will be assigned and the sum of the assessed values of all of
these properties. In addition, by carefully comparing the attributes
of all of the properties in the sample to which one land use classifica-
tion has been assigned to the attributes of all of the properties in the
sample to which each other classification has been assigned, it should
be possible to develop a set of criteria which will permit the determi-
nation of the most appropriate land use classification to assign to each
parcel of land to which this ad valorem taxation policy will be applied.
5.9
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However, to perform this determination, it will next be neces-
sary to obtain information concerning the extent to which each of these
parcels of land satisfies these criteria. Specifically, it will be neces-
sary to gather information describing those attributes of each of these
properties which corresponds to the attributes of the parcels in the
representative sample which have been utilized to define these criteria.
Moreover, to identify those instances in which modifications in the
activities which are performed on parcels of land should be accom-
panied by changes in the land use classifications and ad valorem tax
rates which are applied to these properties, it will also be necessary
•to monitor continually these attributes of each property to which the
policy is applied. In addition, the calculation of the appropriate total
tax bill to impose upon each of these properties at each point in time
requires the continual reassessment of the values of the properties.
Finally, to validate and, when necessary, to refine the system of land
use classifications and the ad valorem tax rates to employ with these
classifications, it will be desirable periodically to produce revised
estimates of the external costs which are attributable to the activities
which are performed on a representative sample of these properties.
Yet, after all of this information has been accumulated, the infor-
mation retrieval capabilities which are required for the implementation
of this taxation policy is remarkably simple. Specifically, recognizing
that comprehensive data files stipulating the assessed value of each
property within any municipality already have been assembled for the
calculation of the standard property tax, the implementation of a policy
of ad valorem property taxation with tax rates conditional upon land use
requires only, first, the addition to this data file of the land use clas-
sification which has been assigned to each property in the municipality
and, second, the creation of a new data file specifying the ad valorem
tax rate which is employed with each land use classification. Then, to
calculate the total tax bill of any property, it is necessary merely to
extract from the initial data file the assessed value and the land use
classification of this property; next, to retrieve from, the new data file
the ad valorem tax rate which applies to this land use classification;
and, finally, to multiply the assessed value of the property by the ad
valorem tax rate to determine the property's total tax bill. Conse-
quently, the cost of information retrieval required for the implementa-
tion of this taxation policy should not be substantially greater than the
cost of information retrieval which has been experienced with the
standard property tax.
5. 10
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5.1.3 Potential Inequities , Abuses,
and Enforcement Problems
The total tax bill which is imposed upon any property owner by a
policy of ad valorem property taxation with tax rates conditional upon
land use is strictly proportional to the assessed value of his property,
Ostensibly, the assessed value of any property is systematically
related to the market value of this property. However, because any
individual parcel of land is exchanged in the market only infrequently,
it is impossible to guarantee that this systematic relationship between
the assessed value and the market value of each property actually
exists at all points in time. In addition, the appraisal practices which
are employed to determine the assessed value of a property require
the application of considerable amounts of judgment by the assessor.
Consequently, substantial opportunity exists for the arbitrary and pref-
erential assessment of property values. Moreover, since the obtaining
of a preferentially low assessment of the value of any property will
reduce the total tax bill of the owner of this property, a motivation
exists for any property owner to attempt to bribe the tax assessor to
assign an unrealistically low assessed value to his property. Never-
theless, so long as the requirement that the assessed values of prop-
erties must be systematically related to the market values of these
properties is retained, reasonable limits can be imposed upon the
extent to which the preferential assessment of property introduces
inequities or abuses into any policy of ad valorem property taxation
simply by periodically comparing the assessed values of recently
exchanged properties with their market prices.
Moreover, the obvious desirability of retaining this control on
the unintentional or intentional introduction of inequities or abuses into
the assessment and taxation of property constitutes a strong argument
against the adoption of any changes in existing assessment practices
intended to correct any of the deviations from social optimality which
are generated by a policy of ad valorem property taxation. Thus, it
generally would be inadvisable to adopt a strategy of decreasing the
assessed value of a property on which a modification of activity has
produced both a decrease in external costs and an increase in the
market value of the property. The adoption of this strategy would
destroy the linkage between assessed values and market values and,
hence, would increase the probability of the arbitrary preferential
assessment of property values.
5. 11
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In addition to being strictly proportional to the assessed value of
the property, the total tax bill which is imposed upon a property by a
policy of ad valorem property taxation with tax rates conditional upon
land use is also sensitive to the land use classification which is assigned
to the property, since this land use classification will determine the ad
valorem tax rate which is applied to this property. Hence, a monitor-
ing system must be developed to determine the initial land use classi-
fication of each parcel of land to which the policy will be applied and,
subsequently, to detect the need to change the land use classification
of parcels whose utilizations have been modified. This need for the
continual monitoring of the activities performed on properties intro-
duces two additional prospects for inequities and abuses.
First, the unintentional or intentional assignment of an inappro-
priate land use classification to any parcel of land will impose upon the
owner, of this parcel of land either an undesirably high or an undesir-
ably low total tax bill. However, the probability that inequities of this
type might arise can be minimized by defining the specifications which
delineate each land use classification in terms of readily observable
and measurable attributes of land use activities. Yet, this strategy
will be effective in promoting social optimality through the application
of a policy of ad valorem property taxation with tax rates conditional
upon land use only if these readily observable and measurable attributes
constitute those attributes which distinguish appropriately among land
use classifications in terms of the promotion of the attainment of social
optimality. Thus, in general, a tradeoff between the ease of monitor-
ing land use activities and the effective promotion of social optimality
must be accomplished in developing the best attainable land use classi-
fication system for any actual taxation policy of this type. Obviously,
the more subtle are the distinctions between different land use classi-
fications, the greater will be (.he prospects of inequities or abuses
resulting from the inappropriate assignment of land use classifications
to parcels of land.
In addition, inconsistencies in the temporal pattern of the moni-
toring of land use activities can produce further inequities in the impact
of this taxation policy upon different property owners. Only a proce-
dure which continuously monitors the activity which is performed on
each parcel of land to which the policy is applied will successfully
detect each modification of activity on any parcel of land which should
precipitate a change in the total tax bill imposed upon that parcel of
land at precisely that point in time at which this modification of activ-
ity is undertaken. Consequently, any practical monitoring procedure
5. 12
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will necessarily produce some inequities between property owners
whose modifications of activity are detected immediately after the mod-
ifications are performed and property owners whose modifications of
activity are not detected until a substantial period of time has elapsed
after the initiation of the modifications.
Finally, if, as is likely, the external costs which are attributable
to the pursuit of any particular activity in any particular situation can-
not be measured with sufficient accuracy to constitute a strongly defen-
sible basis for the determination of the appropriate ad valorem tax rate
to apply to each land use classification, the tax rates which actually
are applied undoubtedly will be influenced to some extent by the polit-
ical process. If this process is especially responsive to pressure
exerted by potential developers, the tax rates which are applied to land
use classifications whose development promises high profits to these
developers are likely to be set at levels which are low relative to the
socially optimal tax rates, while the tax rates which are applied to
land use classifications whose continued existence retards develop-
ments which promise high profits to these developers are likely to be
set at levels which are higher than the socially optimal tax rates. Con-
versely, if environmental activists exert excessive influence over the
process through which tax rates are established, the opposite biases
in tax rates are likely to be observed. However, there is no reason
to believe that either of these biases will be observed generally -- or
that the biases will counteract each other to produce a system of tax
rates which approximates the socially optimal system. Rather, exam-
ples of both types of biases can be observed in the municipal zoning
ordinances which have been adopted in various political jurisdictions;
and there is no reason to believe that similar situations would not arise
in the implementation of policies of ad valorem property taxation with
tax rates conditional upon land use.
5. 1.4 Legal Constraints and
Political Acceptability
The judicial system requires that any taxation policy which is
adopted by any political jurisdiction must apply uniformly to all entities
which arc subject to this taxation policy. In the context of a policy of
ad valorem property taxation with tax rates conditional upon land use,
this requirement essentially declares that any differences in the tax
rates which are applied to different land use classifications must accu-
rately reflect differences in either the demonstrable benefits obtained
by society or the demonstrable costs imposed upon society by the
5. 13
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activities which are performed upon properties to which these land use
classifications have been assigned. Thus, the political jurisdiction
which adopts a taxation policy of this type must be prepared to defend
its land use classification system in court on the basis of the validity
of both the distinctions which this classification system makes between
land use activities and the appropriateness of the tax rates which are
employed with the various classifications.
Moreover, although it is impossible to make any strongly defen-
sible statements concerning the near-term political acceptability of
any of the land use control mechanisms which are investigated in this
chapter in the absence of comprehensive -attitudinal surveys of a rep-
resentative sample of political jurisdictions (which have been precluded
by the resource constraints of this project), it is possible to express
some general impressions of the apparent prospects for the acceptance
of a policy of ad valorem property taxation with tax rates conditional
upon land use by individual political jurisdictions. Specifically, to the
extent that this policy is similar to the existing property tax system
and is considered to be a reasonable extension of this system by the
constituents of these jurisdictions, it is more likely to be politically
acceptable than many of the alternative policies which are evaluated
in this chapter.
However, the adoption of this policy is unlikely to provide net
benefits to all of these constituents. Rather, in general, it will pro-
vide net benefits to some of these individuals and will impose net costs
upon others. Therefore, the overall political acceptability of the
policy will be determined by the relative influence exerted by these
groups within the political process. Yet, if, as is likely, the costs
arising from the adoption of this policy will be concentrated upon a
relatively small number of property owners, while the benefits will
be relatively widely dispersed among the remainder of the constituents
of the jurisdiction, the individuals who bear the costs will be much
more strongly motivated to attempt to influence the political process
than will the individuals who obtain the benefits, since the benefits
which result from the adoption of the policy assume the properties of
a public good for these individuals. Consequently, unless the individ-
uals who support this policy can effectively coalesce their interests,
it appears likely that those individuals who oppose the adoption of a
policy of this type will exert more influence over the political process
than the individuals who support the adoption of the policy. This rela-
tive imbalance of political influence may produce either a failure by
the political system to adopt a policy of ad valorem property taxation
5. 14
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•with tax rates conditional upon land use when the adoption of this policy
would be socially desirable or, at least, the adoption of a system of
tax rates which does not conform to the socially optimal system of tax
rates.
5. 1.5 Expected Impact on
Land Use Patterns
The impact which the adoption of a policy of ad valorem property
taxation with tax rates conditional upon land use will exert upon the
pattern of development in any area is essentially an empirical issue
which cannot be resolved definitively solely on the basis of theoretical
considerations. Specifically, for any land use activity, the effect of
the adoption of this taxation policy upon the continued pursuit of this
activity at its present location will be determined by the effect of the
adoption of the policy upon the net returns which will be generated at
this location by the existing land use activity and all alternative land
use activities. If the adoption of the policy causes some alternative
land use activity to produce net returns which exceed the net returns
which will be earned by the present land use activity by more than the
cost of discontinuing the present activity and initiating the alternative
activity, the alternative activity will replace the present activitity at
this location. Yet, since the adoption of a policy of ad valorem taxa-
tion with tax rates conditional upon land use will impose substantially
different total tax bills upon any particular parcel of land when differ-
ent land use activities are pursued upon that parcel of land, it seems
extremely likely that the implementation of this tax will induce substan-
tial modifications in the land use pattern which has existed prior to the
adoption of this policy. In particular, this policy should encourage the
expanded development of those activities which, as a result of the
policy, experience decreases in the external costs which they absorb
which exceed the increases in the total tax bills which they incur; while
it should encourage reductions in the pursuit of those activities which
experience increases in their total tax bills which exceed the decreases
in the external costs which they absorb.
Thus, it can be concluded that the adoption of a taxation policy of
this type will induce the growth of some activities and discourage the
growth of other activities. However, the net effect upon the overall
growth rate of the entire community is generally indeterminate and
cannot be predicted for any particular community without all of the
detailed information which is required to develop and implement the
socially optimal policy of ad valorem property taxation with tax rates
conditional upon land use for that community.
5. 15
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5.2 Annual "Externality" Fees
For the payment of an annual "externality" fee to the government
by the owner of the property on which an external effect is produced to
be capable of exercising optimal control over the generation of exter-
nalities between private land uses, the fee which is imposed upon any
parcel of land must be directly related to the volume of external effects
which have been produced by the activity performed on this parcel
during the preceding year. Specifically, the annual "externality" fee
must be equal to the external costs incurred by the remainder of society
which are attributable to the activity which has been performed upon
this parcel during that year. If the fee is set at this level, the owner
of this property will be compelled to recognize that he will be required
to bear the full economic cost of any activity which he pursues on his
property during any year either in the form of the direct internal costs
which he incurs as he performs this activity or in the form of the fee
which he pays to the government at the end of the year during which he
performs this activity. Consequently, he will incorporate both of these
elements of cost into each decision which he makes concerning the uti-
lization of his property and, hence, will pursue the socially optimal
utilization of this property.
However, the implementation in any single year of a system of
annual "externality" fees which fulfills these conditions for each parcel
of land to which this system is applied will require, in general, the
identification of the portion of the total volume of external effects
absorbed by each member of society which is attributable to the activ-
ity performed on each of these parcels during this year and, then, the
measurement of the external costs incurred by each of these individuals
as a result of his absorbing this amount of external effects during this
year. Obviously, the accurate monitoring of the quantity of external
effects which are absorbed by each member of society from each source
of external effects during any year will, at least, be extremely expen-
sive. In fact, if individual members of society absorb the same type
of external effect (e.g., air, water, or noise pollution) from several
different sources simultaneously, the identification of the portion of
the total volume of this external effect which each of these individuals
absorbs from each of these sources may be technically impossible.
Moreover, even if the volume of external effects which each individual
absorbs from each source can be identified, the accurate estimation of
the external costs which this individual incurs from his absorbing these
external effects will be extremely difficult, if not theoretically impos-
sible, for the reasons discussed in detail in Section 5. 1.2.
5.16
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Finally, the implementation of a system of annual "externality"
fees which is capable of unambiguously promoting the attainment of the
socially optimal land use pattern requires the repetition of this identi-
fication and measurement process on an annual basis. Therefore, it
appears virtually inevitable that the implementation of that system of
annual "externality" fees which is theoretically optimal when all of the
inforination required for the development and administration of this
system is available at no cost will prove to be both prohibitively expen-
sive and technically infeasible when the difficulty and cost of obtaining
this information is taken into consideration.
Yet, a demonstration of the general social undcsirability of imple-
menting this particular system of annual "externality" fees does not
constitute a demonstration of the social undcsirability of implementing
any system of annual "externality" fees. Rather, it is entirely possible
that it might be socially desirable to develop and implement a system
of annual "externality" fees which consists of, first, an exhaustive set
of mutually exclusive land use classifications such that the external
costs which are attributable to the performance of all activities to
which any single classification is assigned are reasonably similar,
while the external costs which are attributable to the performance of
activities to which different classifications are assigned are demon-
strably different; and, second, for each of these land use classifica-
tions, a standard annual "externality" fee which is imposed upon each
property to which the classification is assigned. Consequently, the
remainder of this section is devoted to an investigation of the prop-
erties of a system of annual "externality" fees of this type.
5,2. 1 Expected Deviations from
Social Optimality
Under any system of annual "externality" fees of this type, the
fee which is imposed upon any parcel of land is unchanged by any mod-
ification of the activity performed upon this parcel of land which does
not precipitate a change in the land use classification which is appli-
cable to this parcel. Thus, this system of annual "externality" fees
provides no incentives for any property owner to reduce the generation
of adverse external effects by the activity performed on his property
when this action will not shift this property into a different land use
classification with a lower "externality" fee. Similarly, this system
provides not disincentives for any property owner to increase the gen-
eration of adverse external effects by the activity performed on his
property when this action will not shift this property into a different
5. 17
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land use classification with a higher "externality" fee. Therefore, to
the extent that increasing the generation of adverse external effects
upon any property is consistent with increasing the profits which are
earned by the activity performed on this property (or, equivalently, to
the extent'that controlling the generation of adverse external effects
upon any property requires the accepting of a reduction in the profits
which are earned by the activity performed on this property), it can
reasonably be expected that, within any land use classification, the
quantity of adverse external effects generated by the activity performed
on any parcel of land to which this classification is assigned will tend
to converge upon the maximum quantity of adverse external effects
which can be generated by the activity performed on this parcel without
precipitating the assignment to this parcel of a land use classification
with a higher "externality" fee.
The severity of this bias in the incentives which are provided by
this system of annual "externality" fees can be reduced to some extent
by creating a more detailed structure of land use classifications and,
then, employing different annual "externality" fees with each of these
more detailed classifications. Yet, there inevitably will remain, for
many properties within any land use classification which ultimately is
delineated, a disincentive to initiate any reductions in the generation
of adverse external effects upon these properties which will not shift
the properties into different land use classifications with lower "exter-
nality" fees. In addition, any increase in the number of land use clas-
sifications which are employed in a system of annual "externality" fees
will cause an increase in the difficulty and, hence, the cost of monitor-
ing the continuing compliance of the activity performed upon each prop-
erty with the stipulations of the land use classification to which this
property is assigned at each point in time. The greater is the number
of land use classifications which are delineated, the greater will be the
frequency with which a modification of the activity performed on a prop-
erty will precipitate a change in the land use classification which should
be assigned to this property, and the more subtle will be the modifica-
tions of the activities performed upon parcels of land which will precip-
itate changes in the land use classifications assigned to these parcels
of land. Therefore, increasing the number of land use classifications
which are delineated in a system of annual "externality" fees will
increase the optimal frequency of monitoring, the optimal sophistica-
tion of monitoring, and, hence, the cost of monitoring. Consequently,
in attempting to identify the most socially desirable classification of
land use for a system of annual "externality" fees, it will be necessary
to balance the relatively large deviations from the socially optimal
5. 18
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pattern of development which will be associated with the delineation of
only a relatively small number of land use classifications against the
relatively high monitoring costs which will be associated with the
delineation of a relatively large number of classifications.
5.2.2 Information Requirements and
Information Retrieval Considerations
^^ •
The development of a potentially socially desirable system of
annual "externality" fees requires the delineation of an acceptable sys-
tem of land use classifications and the determination of the appropriate
annual "externality" fee to employ with each of these classifications.
To delineate an acceptable system of land use classifications, it is
necessary, first, to identify mutually exclusive groups of properties
such that the external costs which are attributable to the activity per-
formed upon each property within a particular group is reasonably
constant, while the external costs which are attributable to the activ-
ities performed on properties within different groups are demonstrably
different. Then, those attributes of properties which distinguish the
properties in each of these groups from the properties assigned to the
other groups must be isolated. To perform these tasks, it is neces-
sary to obtain data, which specify, for at least a representative sample
of the properties upon which annual "externality" fees will be imposed,
the external costs which are attributable to the activity which is per-
formed on each property in the sample and the attributes of this prop-
erty which might distinguish it from properties to which different land
use classifications are likely to be assigned.
The technical and motivational problems in the provision of rea-
sonably accurate estimates of the external costs attributable to the
performance of any activity on any parcel of land which have been
described in detail in Section 5. 1.2 in the context of the development
of a policy of ad valorem property taxation with tax rates conditional
upon land use will also prevail in the development of any system of
annual "externality" fees. Consequently, once again, the estimates
of external costs which will be obtainable for the delineation of an
acceptable system of land use classifications will necessarily be rela-
tively crude. Nevertheless, on the basis of these estimates, it should
be possible to separate the properties in the representative sample
into mutually exclusive groups which fulfill the conditions specified in
the preceding paragraph.
5.19
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After these mutually exclusive groups of properties have been.
produced, it will be necessary to identify those attributes of the prop-
erties within any particular group which distinguish these properties
from the properties in the remaining groups. In general, it seems
reasonable to expect that the attributes of the activity performed upon
any parcel of land which will provide these distinctions will be related
to those characteristics of this activity which determine the1 level of
external costs which are attributable to its performance. Thus, to the
extent that the level of external costs which are attributable to the per-
formance of any particular activity on any parcel of land is affected by
the volume of external effects which are generated by this activity and
to the extent that this volume of external effects can be measured at
acceptable levels of cost using technically feasible monitoring technol-
ogy, the volume of external effects generated by the activity performed
on the various properties in the sample should constitute an appropriate
attribute to distinguish among the properties in the different groups.
Similarly, to the extent that the level of external costs which are attrib-
utable to the pe rformance of any activity on any parcel of land is
affected by the characteristics of the properties -- and the activities
performed upon the properties -- which incur these external costs,
these characteristics of these properties should constitute reasonable
attributes to distinguish among the properties in the different groups.
Thus, if the initiation of an industrial activity in an existing resi-
dential neighborhood will generate higher external costs than the initi-
ation of this same industrial activity in an existing industrial neighbor-
hood, the characteristics of the neighborhood in which an industrial
activity is located should constitute an appropriate attribute to distin-
guish among the properties in some of the groups which have been
identified. Similarly, if the initiation of residential land uses can
impose external costs upon properties containing existing industrial
activities by locating in the neighborhood of these activities and, hence,
increasing the level of external costs which this industrial activity
imposes upon the remainder of society (and for which this industrial
activity is charged under the prevailing system of annual "externality"
fees) for any volume of external effects which this industrial activity
generates, the characteristics of the neighborhood in which a residen-
tial activity is located should also constitute an appropriate attribute
to distinguish among the properties in different groups.*
*Observe that this analysis implies that in any neighborhood con-
taining a mixture of industrial and residential activities, positive annual
"externality" fee should be imposed upon both properties upon which
industrial activities are performed and properties upon which residen-
tial activities are pursued.
5.20
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In general, a substantial amount of this desired information con-
cerning the attributes of each of the properties in the representative
sample can be obtained from existing land use and municipal zoning
records. Yet, almost invariably, it will be necessary to produce
some portion of this desired information through direct observation
and inspection of these properties.
Nevertheless, after all of the desired information concerning the
attributes of the properties in the representative sample has been
assembled, it should be possible to develop a set of criteria which will
permit the determination of the appropriate land use classification to
assign to each parcel of land upon which an annual "externality" fee will
be imposed by carefully comparing the attributes of all of the properties
in each of the mutually exclusive groups of properties which have been
identified to the attributes of all of the properties in each of the other
mutually exclusive groups. Moreover, the annual "externality" fee
which should be imposed upon each property to which any particular
land use classification is assigned can be set at a level equal to the
estimated external costs attributable to the activity performed upon
each of the properties in the representative sample which are included
in the mutually exclusive group associated with this land use classifi-
cation .
However, to determine the land use classification which should
be assigned to each of the properties upon which an annual "externality"
fee will be imposed which is not included in the representative sample,
it will be necessary to gather information describing those attributes
of each of these properties which correspond to the attributes of the
properties in the representative sample which have been utilized to
define the set of criteria which distinguish among the various land use
classifications. Moreover, to identify those instances in which modi-
fications in the activities which are performed on parcels of land should
be accompanied by changes in the land use classifications and annual
"externality" fees which are applied to these properties, it will also be
necessary to monitor continually these attributes of each property to
which this policy is applied. Finally, to validate and, when necessary,
adjust the system of land use classifications and the annual "externality"
fee to employ with each of these classifications, it will be desirable
periodically to produce revised estimates of the external costs which
are attributable to the activities which are performed on a representa-
tive sample of these properties.
5.21
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After this information has been accumulated, the information
retrieval capabilities which are required for the implementation of a
system of annual "externality" fees is relatively modest. Specifically,
it is necessary merely to create one data file specifying the land use
classification which is applicable to each parcel of land upon which an
annual "externality" fee will be imposed and another data file specify-
ing the annual "externality" fee which is employed with each land use
classification. Then, to determine the annual "externality" fee which
is applicable to any property at any point in time, the agency respons-
ible for the administration of this system must only extract the land
use classification of this property from the first data file and, subse-
quently, to retrieve the annual "externality" fee which is employed with
this land use classification from the second data file. Moreover, to
produce the appropriate change in the annual "externality" fee which is
imposed upon any parcel in response to a modification of the activity
performed on this parcel, it is necessary merely to replace the exist-
ing laild use classification specified for this property in the first data
file with the land use classification which is applicable to the modified
activity which is presently being performed on this property.
5.2.3 Potential Inequities, Abuses,
and Enforcement Problems
For the most part, the potential inequities and abuses which are
likely to arise under a system of annual "externality" fees are essen-
tially the same as the potential inequities and abuses which are likely
to arise under a policy of ad valorem property taxation with tax rates
conditional upon land use. Thus, since the annual "externality" fee
which is imposed upon any property is determined by the land use
classification which is assigned to the property, the intentional or
unintentional assignment of inappropriate land use classifications to
parcels of land will produce inequities in the treatment of different
property owners. In addition, since the external costs which are
attributable to the performance of any particular activity in any par-
ticular situation is unlikely to be measurable with sufficient accuracy
to constitute a strongly defensible basis for the determination of the
appropriate annual "externality" fee to employ with each land use clas-
sification, it is highly probable that the annual "externality" fees which
actually are employed will be influenced to some extent by the political
process.
In particular, it is likely that the annual "externality" fees which
are employed with land use classifications incorporating activities per-
formed by individuals exerting substantial political influence will be
5.22
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set at levels which are lower than the socially optimal fees, while the
annual "externality" fees which are employed with land use classifica-
tions incorporating activities performed by individuals exerting rela-
tively little political influence may be set at levels which are higher
than the socially optimal fees. Moreover, since the establishment of
inappropriate annual "externality" fees for particular land use classi-
fications and the assignment of inappropriate land use classifications
to particular parcels of land will directly affect the wealth of the
owners of properties to which these inappropriate fees and classifica-
tions are applied, motivations will exist for these property owners to
offer bribes to public officials for the preferential assignment of land
use classifications and the preferential establishment of annual "exter-
nality" fees.
Finally, inequities in the treatment of different property owners
can be produced by the inconsistent monitoring of the activities which
are performed upon various parcels of land. Once again, inequities
will arise between property owners whose modifications of activity are
detected immediately after the inodifications are performed and prcp-
erty owners whose modifications of activity are not detected until a
substantial period of time has elapsed after the initiation of the modi-
fications. However, the prospect of these inequities does not imply
that all properties should be subjected to the same intensity of moni-
toring. Rather, the socially desirable intensity of monitoring of each
parcel of land should be determined on the basis of both the expected
probability that the activity performed upon this parcel will be modified
in a manner which will precipitate a change in the land use classifica-
tion which is applicable to this parcel and the magnitude of the change
in external costs which can be expected to be produced by any modifi-
cation of activity which is initiated on this parcel.
Nevertheless, it is imperative that a reasonable degree of inten-
sity must be exercised in the monitoring of the activity performed upon
each parcel of land upon which an annual "externality" fee is imposed.
If the monitoring of the continuing compliance of the activity performed
upon any parcel of land with the stipulations of the land use classifica-
tion assigned to this parcel of land becomes so ineffectual that the
owner of this property can reasonably assume that modifications of the
activity which he performs upon his property will have no effect upon
the land use classification or, hence, the annual externality fee which
is assigned to this property, the property owner rationally will regard
the annual "externality" fee to be a lump-sum tax -- a tax whose mag-
nitude remains constant regardless of the activity which is performed
5.23
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upon the property. If this situation arises, the annual "externality"
fee will exert no influence upon either the activity which is performed
upon the property or the external costs which are attributable to the
performance of this activity. Consequently, the effectiveness of any
system of annual "externality" fees in promoting the attainment of the
socially optimal pattern of development will be strongly influenced by
the diligence and accuracy of the monitoring procedures which are
established to administer the implementation of this system.
5.2.4 Legal Constraints and
Political Acceptability
As in the case of a policy of ad valorem property taxation with
tax rates conditional upon land use, the judicial system requires that
any system of annual "externality" fees which is adopted by any polit-
ical jurisdiction must apply uniformly to all entities which are subject
to this system of fees. Essentially, this requirement declares that
any differences in the annual "externality" fees which are employed
with different land use classifications must accurately reflect differ-
ences in the demonstrable external costs imposed upon society by the
activities which are performed upon properties to which these land use
classifications have been assigned. Thus, any political jurisdiction
which adopts a system of annual "externality" fees must be prepared
to defend in court both the validity of the distinctions which the land
use classification structure embodied in this system of annual "exter-
nality" fees makes between different land use activities and the appro-
priateness of the annual externality fees which are employed with the
various land use classifications in this structure.
In addition to fulfilling these legal requirements, a system of
annual "externality" fees must be politically acceptable within a juris-
diction before this jurisdiction will adopt the system. To the extent
that this system is considered to be similar to existing fee or licensing
mechanisms by the constituents of this jurisdiction, it is reasonably
likely to be regarded as acceptable by these constituents. However,
to the extent that these individuals view the system of annual "external-
ity" fees as a unique and unprecedented taxation mechanism, its polit-
ical acceptance by these constituents undoubtedly will require the exer-
tion of considerable public relations efforts by its proponents.
Moreover, since any realistic system of annual "externality"
fees will not provide positive net benefits to all of the constituents of
the jurisdiction which is considering the adoption of a fee system, the
5.24
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political acceptability of any system of fees will be determined to some
extent by the relative political influence of those constituents who obtain
net benefits from its adoption and those constituents who incur net costs
as a result of its adoption. Finally, to the extent that there is general
political resistance to the adoption of any policy which increases taxes,
the political acceptability of the initiation of any system of annual
"externality" fees will be greater if the proposal to adopt this system
is accompanied by a proposal to reduce other taxes than if the proposal
to adopt the system is introduced in isolation.
5.2.5 Expected Impacts on
Land Use Patterns
The impact of the adoption of a system of annual "externality"
fees upon the pattern of development in any area is inevitably an empir-
ical issue which cannot be resolved definitively solely on the basis of
theoretical considerations. To the extent that the adoption of any sys-
tem of this type increases the total cost of performing any particular
land use activity above the cost which would have prevailed in the
absence of the system, the adoption of the system will discourage the
performance of this land use activity. Conversely, to the extent that
the adoption of the system decreases the total cost of performing any
particular land use activity (including the external costs absorbed by
the activity) below the cost which would have prevailed in the absence
of the system, the adoption of the system will encourage the perform-
ance of this land use activity. Any system of annual "externality" fees
can be expected to produce the first type of effect in some instances
and the second type of effect in other instances. Thus, the net effect
of the adoption of any system of this type upon the overall growth rate
of the community is generally indeterminate.
Yet, since any system of annual "externality" fees will impose
substantially different fees upon any parcel of land when different land
use activities are performed upon this parcel of land and since the
initial application of a system of fees in any jurisdiction will signifi-
cantly affect the net returns which can be earned on any parcel of land,
the adoption of any system of this type in any jurisdiction can be
expected to induce substantial modifications in the land use pattern
which has existed in this jurisdiction prior to the adoption of the sys-
tem of fees. In addition, the grosser are the distinctions between the
types of land use activities to which different land use classifications
are applied and the greater are the differences between the annual
"externality" fees which are employed with different land use classifi-
cations, the less frequent will be the occurrence of modifications in
5.25
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land use activities which precipitate changes in the land use classifi-
cations assigned to parcels of land which produce increases in the
annual "externality" fee imposed on these parcels and, hence, the
greater will be stability of those land use activities whose modifica-
tion will generate these effects. Moreover, since these incentives will
exist to some extent with any system of annual "externality" fees, any
system of this type will increase the temporal stability of those land
use activities whose modification will produce increases in the annual
"externality" fees imposed upon the parcels containing these activities.
5.3 Lump-Sum Payment for Externalities Prior
to Change in Permissible Land Use Status
For a lump-sum payment for externalities which is exacted only
in the event of a change in the zoning or permissible land use status of
any parcel of land to be capable of exercising optimal control over the
generation of externalities between private land uses, the payment
which is applied to any property owner when he proposes a change in
the zoning or permissible land use status of his property must be set
equal to the discounted present value of the difference between the
external costs which the performance of the proposed land use activity
on this property will impose upon all other members of society during
each year in the future and the external costs which the continued per-
formance of the land use activity presently pursued on this property
will impose upon these same individuals during each of these years
when the socially optimal allocation of all other resources is attained
in each of these years. If the payment is set at this level, each prop-
erty owner will be required to recognize and absorb, prior to initiating
upon his property any new land use activity which will require a change
in zoning or other administrative approval, the total incremental costs
which will be incurred by all members of society (i. e. , both changes
in his own internal costs and changes in the external costs absorbed by
the remainder of society) if the new activity is introduced. Conse-
quently, a property owner will not choose to initiate any new land use
activity on his property unless the future benefits which he expects to
obtain from the performance of this activity exceed the total future
costs which all members of society expect to incur if this activity is
performed on this property; and, hence, he will pursue the socially
optimal utilization of his property.
5.26
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Clearly, if lump-sum payments for externalities are to encour-
age appropriately the initiation of new land use activities which will
produce decreases in the discounted present value of the external costs
which are attributable to the activities which are performed upon par-
ticular parcels of land, the payments for externalities must flow from
the government to the owners of these properties (i.e. , subsidies must
be paid to property owners) in these instances. Conversely, if these
payments are to discourage appropriately the initiation of new land use
activities which will generate increases in the discounted present value
of these external costs, the payments must flow from property owners
to the government (i. e. , fees must be paid to the government).
In addition, since lump-sum payments for externalities must be
made only when designated events occur (e.g. , the approval of an appli-
cation for a change in the zoning or the permissible land use status of
a property), the unambiguous promotion of the attainment of social
optimality through the application of payments of this type requires that
a designated event must occur whenever a modification of the activity
which is performed upon any parcel of land changes the discounted
present value of the external costs which are attributable to the activity
performed on that parcel. Thus, for example, requiring a lump-sum
payment for externalities on each occasion when a change in zoning is
approved will unambiguously promote the attainment of social optimality
only if a change in zoning is required in every instance in which a
change in the activity performed on a parcel of land will change the
discounted present value of the external costs which are incurred by
society. For this condition to be fulfilled, the land use classifications
delineated in the existing municipal zoning ordinance must constitute
an exhaustive set of mutually exclusive land use classifications such
that the discounted present value of the external costs which are attrib-
utable to the performance of all of the activities included within any
single classification are identical, while the discounted present value
of the external costs which are attributable to the performance of activ-
ities included in different classifications may be demonstrably different.
Ostensibly, the land use classifications which are delineated
within any municipal zoning ordinance should exhibit precisely these
properties. However, the frequent occurrence of attempts by zoning
administrators and concerned citizens to impose, upon property owners
requesting changes in zoning, constraints which would permit these
property owners to pursue upon their properties only a subset of the
land use activities which are generally permissible on properties to
which the requested land use classifications are applied strongly
5.27
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implies that these zoning administrators and concerned citizens do not
believe that the external costs which are attributable to the various
activities whose performance is permitted within any of these land use
classifications are identical. To the extent that the objections of these
individuals are justified, the promotion of the attainment of social
optimality through the imposition of lump-sum payments for external-
ities will necessitate the making of lump-sum payments in many situa-
tions in which changes in zoning are not presently required.
Consequently, if the theoretically optimal control of the genera-
tion of externalities between private land uses is desired, it will be
necessary, in general, to develop a new land use classification system.
such that the discounted present value of the external costs which are
attributable to the performance of all of the activities included within
any single classification are identical and, then, to require that any
modification of the activity performed on any parcel of land which pre-
cipitates a change in the land use classification which is applicable to
the parcel must be formally approved by the agency which is respon-
sible for the collection or dispensation of the lump-sum payments.*
However, the implementation of a system of lump-sum payments
for externalities which fulfills these conditions for each parcel of land
to which this system is applied will, in general, be socially undesir-
able. In particular, the collection or dispensation of lump-sum pay-
ments for externalities will, in numerous instances involving minor
modifications of activities, require the agency which is responsible
for the administration of this system to incur costs in processing
requests for changes in permissible land use status, performing the
*Clearly, if the lump-sum payments which are required when a
modification of activity is initiated are set appropriately, there will be
no justification for denying any request for a change in permissible
land use status. Hence, the approval of any request for a change in
permissible land use status should be automatic and should merely
serve the purpose of requiring each property owner to reveal to the
administrative agency the need for a lump-sum payment. However,
since this payment frequently will flow from the property owner to the
government, some penalty for failing to report a modification of land
use activity to this administrative agency should be established to
overcome the obvious disincentive for any property owner to report
those modifications of this activity which will require him to make a
payment to the government.
5.28
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collection or dispensation of payments, and monitoring the occurrence
of these minor modifications of activities which substantially exceed
the benefits which are obtained by society from the minor improve-
ments in the prevailing pattern of development which are induced by
these efforts. Therefore, instead of developing and implementing a
system of lump-sum payments for externalities which collects or dis-
penses a payment in every instance in which a modification of the
activity which is performed on any parcel of land generates a change
in the discounted present value of the external costs which are attrib-
utable to the activity performed on the parcel of land, it generally will
be more socially desirable to develop and implement a system of pay-
ments in which an appropriate balance has been established between
the incremental costs which will be incurred by society if no lump-sum
payments are provided for certain modifications of activity which gen-
erate changes in external costs and the incremental costs which will be
incurred by the administrative agency if lump-sum payments are pro-
vided for these modifications of activity.
Essentially, a system of this type will consist of, first, an
exhaustive set of mutually exclusive land use classifications such that
the external coats which are attributable to the performance of all
activities to which any single classification is assigned are reasonably
similar while the external costs which are attributable to the perform-
ance of activities to which different classifications are assigned are
demonstrably different; and, second, for each combination of two dif-
ferent land use classifications, a standard lump-sum payment which is
collected from or dispensed to any property owner who initiates a mod-
ification of the activity performed on his property which changes the
land use classification which is applicable to this property from the
first of these two classifications to the second of these classifications.
The remainder of this section is devoted to an analysis of the proper-
ties of a system of lump-sum payments for externalities of this type,
5.3. 1 Expected Deviations from
Social Optimality
Under a system of lump-sum payments for externalities of this
type, no payment if collected from or dispensed to any property owner
in response to a modification of the activity performed on his property
if this modification of activity does not precipitate a change in the land
use classification which is applicable to this property. Therefore, any
system of this type will fail to provide any incentive for any property
owner to initiate any modification of the activity performed on his
5.29
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property which reduces the external costs incurred by the remainder
of society when this modification of activity will not generate a change
in the land use classification assigned to the property for which he will
be paid a subsidy. Similarly, it will fail to provide any disincentive
for any property owner to introduce any modification of the activity
performed on his property which increases the external costs incurred
by the remainder of society when this modification of activity will not
produce a change in the land use classification assigned to the property
for which he will be compelled to make a payment to the government.
Consequently, to the extent that reducing the level of external costs
which are attributable to the performance of any activity requires the
accepting of a reduction in the profits which are generated by the activ-
ity {and, hence, to the extent that increasing the level of external costs
which are attributable to the performance of any activity is consistent
with increasing the profits which are generated by the activity), it can
reasonably be expected that the level of external costs which are attrib-
utable to the activity performed upon any parcel of land to which any
particular land use classification is assigned will tend to converge upon
the maximum level of external costs which can be generated by the
activity without precipitating a change in the land use classification
assigned to this parcel of land for which the owner of the parcel will
be required to make a lump-sum payment to the government.
The severity of the bias in the incentives which are provided by
this system of lump-sum externality payments can be reduced to some
extent by delineating a more detailed structure of land use classifica-
tions and associated lump-sum payments. Yet, there inevitably will
remain, for many properties within each land use classification which
ultimately is delineated, a disincentive to initiate any modifications of
activity which will reduce the generation of external costs but will fail
to precipitate changes in the land use classifications applied to these
properties for which subsidies will be paid to the owners of the prop-
erties. In addition, any increase in the number of land use classifica-
tions which are employed in a system of lump-sum payments for exter-
nalities will cause an increase in the difficulty and the cost of monitor-
ing the continuing compliance of the activity performed upon each
property with the stipulations of the land use classification to which
the property is assigned at each point in time. Consequently, in
attempting to delineate the most socially desirable classification of
land uses for a system of this type, it will be necessary to balance the
substantial deviations from the socially optimal pattern of development
which arise when only a small number of land use classifications are
defined against the considerable monitoring costs which prevail when
a large number of land use classifications are specified.
5.30
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5.3.2 Information Requirements and
Information Retrieval Considerations
The development of a potentially socially desirable system of
lump-sum payments for externalities requires the delineation of an
acceptable system of land use classifications and the determination of
the appropriate lump-sum payment to employ with each possible change
in land use classifications. To delineate an acceptable system of land
use classifications, it is necessary, first, to identify mutually exclu-
sive groups of properties such that the discounted present value of the
external costs which will be imposed upon society during each year in
the future by the activity presently performed upon each property in
any particular group when the socially optimal allocation of all other
resources is attained in each of these years is reasonably constant,
while the discounted present value of the external costs which will be
imposed upon society during each of these years by the activities pres-
ently performed on properties within different groups under these same
circumstances are demonstrably different. Then, those attributes of
properties which distinguish the properties in each of these groups
from the properties assigned to the other groups must be isolated,
To perform these tasks, it is necessary to obtain data which spe-
cify, for at least a representative sample of the properties to which
the system of lump-sum payments for externalities will be applied,
both the external costs whicli will be attributable to the activity which
is presently performed on each property in the sample during each
year in the future when the socially optimal allocation of all other
resources is attained in each of these years and the attributes of this
property which might distinguish it from properties to which different
land use classifications are likely to be assigned. In addition, the
determination of these external costs for any property requires the
identification of the socially optimal allocation of all other resources
in each year in the future and, then, the measurement of the external
costs which will be incurred by all other members of society as a
result of the activity performed on this property when these allocations
of resources prevail in each of these years. Finally, to permit the
calculation of the discounted present value of these external costs, it
will be necessary to determine the appropriate interest rate at which
these external costs should be discounted.
However, the identification of the socially optimal allocation of
resources in any single year requires knowledge of both the supply of,
and the demand for, each good in the economy in this year and any
5.31
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imperfections (e.g., externality, public good, or natural monopoly
problems) which exist in the market for any of these goods in this year.
The obtaining of reasonably accurate information concerning these
topics for even the current year constitutes an extremely difficult task;
and the obtaining of reasonably accurate forecasts of this information
for years in the increasingly distant future is even more difficult.
Moreover, even if acceptable forecasts of the socially optimal
allocation of resources can be generated for each year in the future,
the estimation of the external costs which the activity performed on
each parcel in the representative sample will impose upon the
remainder of society during each year in the future if the forecasted
allocation of resources prevails in each of these years will inevitably
encounter substantial problems. In particular, the technical and moti-
vational problems in the estimation of the external costs attributable
to the performance of any activity on any parcel of land which have
been described in detail in Section 5. 1 . Z will prevail once again in the
development of a system of lump-sum payments for externalities.
Consequently, the estimates of external costs which are obtainable for
even the current year will necessarily be relatively crude. Moreover,
because any individual's estimate of his willingness to pay for the con-
trol of externalities becomes more speculative as the time period for
which this estimate is produced lies further in the future (indeed the
determination of the identities or, even, the characteristics of the
individuals who will be affected by these externalities becomes more
speculative as the time period for which this determination is per-
formed lies further in the future), the estimates of external costs
which will be obtainable for years in the increasingly distant future
will undoubtedly be even less reliable than the estimates which are
obtainable for the current year.
Yet, the process through which the calculation of the discounted
present value of these external costs is performed attaches monoton-
ically decreasing weights to external costs which are incurred in the
increasingly distant future. Therefore, the impact upon the estimated
discounted present value of these external costs of an error of any par-
ticular magnitude in the estimated value of the external costs incurred
in any particular year will diminish as the year for which this error
in measurement occurs lies further in the future. Nevertheless, these
errors of measurement will adversely affect the appropriateness of the
payments which are made under a system of lump-sum payments for
externalities relative to the appropriateness of the payments which arc
made under any policy whose tax or fee structure is determined solely
on the basis of cost and benefit estimates for the current time period.
5. 32
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Finally, even if acceptable estimates of the external costs which
will be attributable to the activity which is presently performed on each
property in the sample can be provided for each year in the future, the
problem of identifying the appropriate interest rate at which to discount
these external costs remains. Theoretically, for each individual who
incurs external costs, this interest rate should be equal to the rate of
interest at which this individual is able to borrow or lend in the market.
However, since there exists no single interest rate at which all indi-
viduals can borrow and lend in the market, it will be necessary to
employ an average of the various interest rates which prevail in the
market during the year as an estimate of the appropriate interest rate
to use in the discounting of external costs for that year. Obviously,
since the years for which external costs must be discounted to calculate
the desired present value all lie in the future, imperfect forecasts of
these average market interest rates will have to be utilized in this dis-
counting process.
Recognizing all of these empirical and theoretical difficulties
associated with obtaining the basic information required for the esti-
mation of the discounted present value of the external costs which will
be imposed upon society during each year in the future by the activity
presently performed upon each property in the representative sample
when the socially optimal allocation of all other resources is attained
in each of these years, it is obvious that any system of lump-sum pay-
ments for externalities will be forced to rely upon relatively crude
approximations of the true discounted present values of these external
costs in its formulation. Nevertheless, on the basis of these approxi-
mations, it should be possible to separate the properties in the repre-
sentative sample into mutually exclusive groups such that the estimated
discounted present value of these external costs is reasonably constant
for each property within each group, but is noticeably different for
properties within different groups.
After these mutually exclusive groups have been produced, it
will be necessary to identify those attributes of the properties within
any particular group which distinguish these properties from the prop-
erties in the remaining groups. Once again, it seems reasonable to
expect that the attributes of the activity performed upon any parcel of
land which will provide these distinctions will be related to those char-
acteristics of this activity which determine the level of external costs
-See Hirshliefer (51).
5. 33
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which are attributable to its performance. Moreover, once again, a
substantial portion of the information concerning these attributes
undoubtedly can be obtained for each of the properties in the represen-
tative sample from existing land use and municipal zoning records;
while obtaining the remainder of this desired information invariably
will require direct observation and inspection of these properties.
Yet, after all of this information has been assembled, it should
be possible to develop a set of criteria which will permit the determi-
nation of the appropriate land use classification to assign to each prop-
erty to which a lump-sum payment for externalities might be applied
by carefully comparing the attributes of all of the properties in each
of the mutually exclusive groups of properties which have been identi-
fied to the attributes of all of the properties in each of the other mutu-
ally exclusive groups. Moreover, the lump-sum payment which should
be applied to each parcel of land for which a modification of activity
has been proposed which will cause the land use classification assigned
to the parcel to change from any particular classification to any other
particular classification can be set equal to the difference between the
estimated discounted present value of the external costs attributable to
the activity performed upon each of the properties in the representative
sample which are included in the mutually exclusive group associated
with the proposed classification of the parcel and the estimated dis-
counted present value of the external costs attributable to the activity
performed upon each of the properties in the sample which are included
in the group associated with the initial classification of the parcel. If
this difference is positive, the lump-sum payment for externalities
must flow from the owner of the parcel of land to the government (i. e. ,
a fee must be paid to the government); while if this difference is nega-
tive, the payment should flow in the opposite direction (i.e., a subsidy
must be paid to the property owner).
Then, to determine the land use classification which should be
assigned to each of the properties to which a lump-sum payment for
externalities might be applied which is not included in the representa-
tive sample, it will be necessary to assemble information describing
those attributes of each of these properties which correspond to the
attributes of the properties in the representative sample which have
been utilized to define the set of criteria which distinguish among the
various land use classifications. In addition, to identify those instances
in which modifications in the activities which are performed on parcels
of land should be accompanied by changes in the land use classifications
which are applied to these properties and the collection or dispensation
5. 34
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of lump-sum payments, it will also be necessary to monitor continu-
ally these attributes of each property to which a lump-sum payment
might be applied. Finally, to substantiate and, when necessary, adjust
the structure of land use classifications and the lump-sum payments to
employ for changes in these classifications, it will be desirable period-
ically to produce revised estimates of the external costs which are
attributable to the activities performed on a representative sample of
these properties during each year in the future.
After all of this information has been assembled, the information
retrieval requirements for the implementation of a system of lump-sum
payments for externalities is modest. In particular, it is necessary to
create only two data files; one specifying the current land use classi-
fication which is applicable to each parcel of land to which a lump-sum
payment for externalities might be applied and one specifying the lump-
sum payment which will be applied to each parcel of land on which a
modification of activity is initiated which will cause the land use clas-
sification assigned to the parcel to change from any one particular
classification to any other particular classification. Then, to deter-
mine the lump-sum payment which is applicable to any parcel of land
when the activity performed on the property is appropriately modified,
the agency responsible for llie administration of this system must
merely extract the current land use classification of the property from
the first data file and, subsequently, to retrieve the lump-sum payment
for externalities associated with this initial land use classification and
the proposed land use classification of the property from the second
data file. Finally, to update the first data file after the land use clas-
sification assigned to any property has been changed, it is necessary
merely to replace the initial land use classification specified for the
property in this file with the land use classification which is applicable
to the property after the activity performed on the property has been
modified.
5.3.3 Potential Inequities, Abuses,
and Enforcement Problems
To a large extent, the potential inequities and abuses which are
likely to arise under a system of lump-sum p; /iv.ents for externalities
are very similar to the potential inequities and abuses which are likely
to arise under either a policy of ad valorem property taxation with tax
rates conditional upon land use or a system of annual "externality"
fees. Thus, since the lump-sum payment which is applied to a parcel
of land on which a modification of activity has been initiated is deter-
mined by both the land use classification assigned to the property prior
5.35
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to the modification of activity and the land use classification assigned
to the property after the modification of activity, the intentiona] or
unintentional assignment of inappropriate land use classifications to
parcels of land either initially or subsequent to modifications of the
activities performed upon these parcels will produce inequities in the
treatment of different property owners.
In addition, since the discounted present value of the external
costs which are attributable to the performance of any particular
activity in any particular situation is unlikely to be measurable with
sufficient accuracy to constitute an incontestable basis for the deter-
mination of the appropriate lump-sum payment to be applied to each
possible change in land use classifications, it is extremely likely that
the lump-sum payments which actually are applied will be influenced
to some extent by the political process. Specifically, it is probable
that the lump-sum payments which are applied to changes in land use
classifications which benefit individuals who exert substantial political
influence will be set at levels which are lower than the socially optimal
levels (i. e. , either an undesirably low fee or an undesirably high sub-
sidy will be applied to these changes in land use classifications); while
the lump-sum payments which are applied to changes in land use clas-
sifications which benefit individuals who exert little political influence
may be set at levels which are higher than the socially optimal levels.
Moreover, since the establishment of inappropriate lump-sum pay-
ments for externalities for particular changes in land use classifica-
tions and the assignment of inappropriate land use classifications to
particular parcels of land will directly affect the wealth of the owners
of properties to which these inappropriate payments and classifications
are applied, motivations will exist for these property owners to offer
bribes to public officials to obtain preferential assignments of land use
classifications and the preferential specification of lump-sum payments
for externalities.
Inequities in the treatment of different property owners can also
be produced by the inconsistent monitoring of the activities which are
performed upon various parcels of land. Although, formally, a sys-
tem of lump-sum payments for externalities requires each property
owner who intends to initiate a modification of the activity performed
on his property which will precipitate a change in the land use classi-
fication applicable to the property to obtain the approval of the agency
responsible for the administration of the system prior to initiating this
modification of activity, property owners who intend to initiate modifi-
cations of activity which will require them to make a lump-sum payment
5.36
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to the government obviously have an incentive to refrain from inform-
ing this administrative agency of their intentions. To suppress this
incentive, it will be necessary both to establish and enforce a substan-
tial fine for failure to obtain approval for a modification of activity
which entails a change in land use classification and to monitor the
activity performed upon each parcel of land to which a lump-sum pay-
ment for externalities might be applied to determine those situations in
which a fine should be levied. Yet, inequities will still arise between
either property owner.s who obtain administrative approval prior to ini-
tiating modifications of activity or property owners whose unapproved
modifications of activity are detected immediately after the modifica-
tions are performed and property owners whose unapproved modifica-
tions of activity are not detected until a substantial period of time has
elapsed after the initiation of these modifications. Consequently, it is
imperative that a reasonable degree of intensity must be exercised in
the monitoring of the activity performed upon each parcel of land to
which a lump-sum payment for externalities might be applied.
Although all of these -inequities, abuses, and enforcement prob-
lems which might arise under a system of lump-sum payments for
externalities are extremely similar to the inequities, abuses, and
enforcement problems which might arise under either a. policy of ad
valorem property taxation with tax rates conditional upon land use or
a. system of annual "externality" fees, it is important to recognise one
critical difference between the likely implications of these potential
inequities, abuses, and enforcement problems for the attainment of
social optimality when these different mechanisms for the control of
externalities are employed. Since both a policy of ad valorem prop-
erty taxation with tax rates conditional upon land uses and a system of
annual "externality" fees compels the payment of charges by property
owners on a regular periodic (i.e. , annual) basis, the possibility of
adjusting these charges to correct for errors in estimation is rela-
tively great when these mechanisms are employed. Conversely, since
a system of lump-sum payments for externalities requires the payment
of fees by property owners or subsidies to property owners only on
those relatively infrequent occasions when modifications of activity
are initiated which entail changes in land use classifications, the prob-
ability of recognizing the social desirability of adjusting these payments
to correct for errors in estimation are relatively low and, hence, the
prospect of converging upon the most socially desirable system of
lump-sum payments for externalities is relatively limited.
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5.3.4 Legal Constraints and
Political Acceptability
As with either a policy of ad valorem property taxation with tax
rates conditional upon land uses or a system of annual "externality"
fees, the judicial system requires that any system of lump-sum pay-
ments for externalities which is adopted by any political jurisdiction
must apply uniformly to all entities to which this system of payments
might be applied. Essentially, this requirement states that any differ-
ences in the lump-sum payments for externalities which are employed
with different changes in land use classifications must accurately
reflect differences in the changes in the discounted present values of
demonstrable external costs which are attributable to the modifications
of activity which are associated with these changes in land use classi-
fications. Therefore, any political jurisdiction which adopts a system
of lump-sum payments for externalities must be prepared to defend in
court both the validity of the distinctions which the land use classifica-
tion structure embodied within this system of lump-sum payments
makes between different land use activities and the appropriateness of
the lump-sum payments which are employed with the various changes
in land use classification which are possible within this structure.
In addition to fulfilling these legal requirements, a system of
lump-sum payments for externalities must be politically acceptable
within a jurisdiction before this justification will adopt the system.
To the extent that the system is regarded by the constituents of the
jurisdiction as similar to existing fee or licensing mechanisms, it is
reasonably likely to be considered to be acceptable by these constitu-
ents. However, to the extent that these individuals view the subsidies
embodied within the system as inappropriate bribes paid to property
owners for pursuing socially desirable activities which they should
have pursued in the absence of any payment, rather than as appropriate
compensation paid to these property owners for damages which they
absorb when they restrict the activity performed on their properties,
the political acceptability of the system of lump-sum payments to these
constituents is dubious.
Finally, since any realistic system of lump-sum payments for
externalities is unlikely to provide positive net benefits to all of the
constituents of the jurisdiction which is considering the adoption of
this system of payments, the political acceptability of any system of
this type will, in general, be determined to some extent by the rela-
tive political influence of those constituents who expect to obtain net
benefits from its adoption and those constituents who expect to incur
net costs as a result of its adoption.
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5. 3. 5 Expected Impacts on
Land Use Patterns
To the extent that the adoption of any system of lump-sum pay-
ments for externalities increases the total cost of initiating any modi-
fication of land use activity above the cost which would have prevailed
in the absence of the system, the adoption of the system will discourage
the initiation of this modification of land use activity and, hence, will
discourage the performance of the land use activity which would have
been initiated if this modification of activity had been undertaken.
Conversely, to the extent that the adoption of the system decreases the
total cost of initiating any modification of land use activity below the
cost which would have prevailed in the absence of the system, the
adoption of the system, will encourage the initiation of this modification
of activity and, hence, will encourage the performance of the land use
activity which will be initiated when this modification of activity is
undertaken. Since any system of lump-sum payments for externalities
will provide disincentives for the initiation of any particular land use
activity in some situations and incentives for the initiation of this
activity in other situations, it is impossible, in general, to determine
whether the system provides a net incentive or a net disincentive for
the initiation of most land use activities solely on the basis of theoret-
ical considerations. Rather, the net effect of any system of this type
in encouraging or discouraging the initiation of any land use activity
almost invariably will be an empirical issue. Consequently, the net
effect of the adoption of any system of lump-sum payments for exter-
nalities upon the overall growth rate of the community is also generally
indeterminate.
Nevertheless, the adoption of any system of this type can be
expected to exert substantial influence over the pattern of development
within any community to which it is applied. Specifically, the adoption
of any system of lump-sum payments for externalities can be expected
to increase the incidence and stability of those land use activities whose
initiation is, on balance, encouraged by the system and to decrease the
incidence and stability of those land use activities whose initiation is,
on balance, discouraged by the system. Moreover, since the effect of
the adoption of a system of this type upon the returns which can be
obtained by property owners when they undertake particular modifica-
tions of activity may be considerable, it is conceivable that the intro-
duction of a system of this type will produce substantial changes in the
pattern of development within the community which adopts the system.
However, once again, whether effects of this magnitude actually will
be observed constitutes an empirical issue which cannot be resolved
purely on the basis of theoretical analysis.
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5.4 Publicly Negotiated Settlement
Among All Affected Parties
Any externality situation is reciprocal in nature. The economi-
cally rational generation of any quantity of an external diseconomy both
provides benefits to the emitters of the externality and imposes costs
upon the recipients of the externality. Thus, for any positive quantity
of an external diseconomy which is rationally generated (i. e. , gener-
ated for non-malicious reasons) by its emitters, any reduction in the
generation of this externality will both provide benefits to the recipients
of the externality in the form of reductions in the external costs which
are incurred by these individuals and impose costs upon the emitters
of the externality in the form of reductions in the profits or satisfac-
tion obtained by these individuals. Conversely, for any quantity of an
external diseconomy which is less than the quantity which would ration-
ally be generated in the absence of any voluntary or compulsory inter-
nalization, an increase in the generation of the externality will both
provide benefits to the emitters of the externality and impose costs
upon the recipients of the externality. Moreover, obviously, similar
reciprocal characteristics will also exist in any situation involving
external economies.
Therefore, in any situation in which an externality is generated,
motivations will exist for both the emitters and the recipients of the
externality to explore the possibility of negotiating a mutually beneficial
modification of the quantity of the externality which is currently being
generated. For example, if there are no legal restrictions upon the
generation of a particular external diseconomy, the recipients of the
external diseconomy will be motivated to offer to the emitters of the
externality some portion of any reduction in external costs which the
recipients will obtain as a result of a decrease in the generation of the
externality to induce the emitters to accept the reduction in their
profits or satisfaction which will accompany the decrease in externality
generation; while the emitters will be motivated to accept the payments
which are offered by the recipients -- and, hence, to perform the
requested decrease in externality generation -- if these payments
exceed the costs which the emitters will incur if the requested
decrease in externality generation is performed. Conversely, if there
are binding legal restrictions upon the generation of the external dis-
economy, the emitters will be motivated to offer to the recipients of
the externality some portion of any gains which the emitters will obtain
as a result of an increase in the generation of the externality to induce
5.40
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the recipients to agree to an appropriate relaxation of these legal
restrictions and, hence, to absorb the incremental external costs
associated with the increase in externality generation; while the recip-
ients will be motivated to accept the payments which are offered by the
emitters -- and, hence, to permit the requested increase in externality
generation -- if these payments exceed the incremental external costs
•which the recipients will incur if the requested increase in externality
generation is performed.
Yet, in either of these cases, it will be possible to negotiate a
mutually acceptable modification in the generation of the externality
only if the gains which will be obtained by the individuals who v;ill
benefit from the adoption of the modification exceed the costs which
will be incurred by the individuals who will suffer decreases in welfare
as a result of the adoption of the modification, since a mutually agree-
able set of payments will exist only if this condition is fulfilled. There-
fore, any successfully negotiated modification in the generation of an
externality will necessarily increase the welfare of at least some
members of society without decreasing the welfare of any other mem-
bers of society and, hence, will unambiguously produce an allocation
of resources which is more socially desirable than the resource allo-
cation which would have existed in the absence of the successful nego-
tiation.
Recognizing that a negotiated settlement among all individuals
•who are affected by an externality will unambiguously promote the
attainment of social optimr.lity, it becomes reasonable in any external-
ity situation to consider holding a public hearing involving all of the
individuals who are affected by the externality to facilitate the initiation
of negotiations among these individuals. Moreover, to establish a basis
•with respect to which these negotiations can proceed, it will be neces-
sary to specify a rigidly enforced assignment of transferable* property
rights to the generation of the externality (i.e. , to delineate the extent
to which the emitters of the externality are legally liable for the
damages caused by the externality). This assignment of property
rights will determine the particular motivations which will exist for
both the emitters and the recipients of the externality to engage in
^Property rights with respect to liability for damages are trans-
ferable if the government enforces liability rules only upon appeal by
one of the parties who are involved in the externality situation. This
enforcement policy introduces the possibility of exchange between these
parties.
5.41
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negotiations. Then, if there are no costs associated with arranging
and enforcing any agreements which are attained in these negotiations,
these motivations will induce the individuals who are affected by the
externality to engage in transactions concerning the permissible gener-
ation of the externality which will proceed until all possible gains from
trade have been realized and, hence, a mutually agreeable settlement
providing for the economically efficient generation of the externality
has been achieved. Thus, potentially, the holding of public hearings
involving all individuals who are affected by particular externalities
may be capable of unambiguously promoting the attainment of social
optima lity.
5.4. 1 Expected Deviations from
Social Optimality
For a negotiated settlement to be capable of attaining the socially
optimal generation of an externality, the costs of arranging and enforc-
ing the negotiated settlement must be zero. Otherwise, the individuals
who are affected by the externality will rationally choose to conclude
their negotiations concerning the control of the externality when they
perceive that the costs which they expect to incur in arranging any
additional modification in the generation of the externality exceed the
gains which they expect to obtain from the performance of the modifi-
cation in externality generation. Consequently, the allocation of
resources which is produced by a negotiated settlement in any realistic
externality situation in which the costs of arranging and enforcing a
settlement of this type are positive will generally differ from the more
socially desirable allocation of resources which would have been pro-
duced by a negotiated settlement in this same situation if these costs
had been zero.
Moreover, unless the costs of arranging and enforcing negotiated
settlements are zero, the income elasticity of demand for each good in
the economy (including the externality which is the subject of the nego-
tiations) is zero, and none of the individuals who are affected by the
externality are consumers, the equilibrium allocations of resources
which are attained through negotiations under alternative assignments
of property rights will be different. Since most, if not all, of these
conditions will fail to be fulfilled in any realistic externality situation,
it will generally be true that different assignments of property rights
in the generation of an externality will produce different economically
efficient allocations of resources at equilibrium. Although each of
these alternative resource .allocations will be more socially desirable
5.42
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than the allocation of resources which would have prevailed if no nego-
tiated settlement had been attained, these alternative resource alloca-
tions, in general, will not all provide the same level of social welfare:.
Therefore, the extent to which social optimality is attained through
negotiation in any realistic externality situation will depend critically
upon the initial assignment of property rights in the generation of the
externality which is established in this situation. Yet, in the absence
of detailed knowledge of the nature of the social welfare function, it if;
impossible to specify the initial assignment of property rights which
will be most socially desirable in any particular externality situation.
Nevertheless, it is possible to provide some general insights into the
considerations which should be addressed in establishing the initial
assignment of property rights and in evaluating the social desirability
of relying upon publicly negotiated settlements as mechanisms for the
control of externalities.
First, since positive costs of arranging negotiated settlements
inhibit exchange, the extent to which negotiated settlements will pro-
duce modifications in the prevailing generation of any externality will
decrease as these costs increase. Moreover, in many externality
situations, the costs of arranging negotiated settlements which are
associated with alternative assignments of property rights arc not
identical. For example, in an externality situation in which a single
firm is generating smoke which adversely affects a large number of
neighboring property owners, the costs of arranging a negotiated
settlement are likely to be greater if the smoke-generating firm is
not liable for the damages which are attributable to its activities than
if the firm is fully liable for these damages. The interests of all of
the neighboring property owners must be coalesced to permit the offer-
ing of a payment to the smoke-generating firm under the former assign-
ment of property rights. Conversely, the smoke-generating firm may
be able to deal with each of the neighboring property owners individ-
ually under the latter assignment of property rights. In any externality
situation of this type, to the extent that the practically attainable level
of social welfare is a monotonically decreasing function of the costs of
arranging a negotiated settlement in the situation (i.e. , to the extent
that a reduction in the costs of arranging a negotiated settlement per-
mits expanded negotiations which, in turn, promote the attainment of
an equilibrium allocation of resources which provides increased social
welfare), it will be socially desirable to adopt that assignment of prop-
erty rights in the generation of the externality for which the costs of
arranging a negotiated settlement are a minimum.
5.43
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Yet, to the extent that the negotiated settlements which are
attained under different assignments of property rights may incorpo-
rate extremely different distributions of welfare among the individuals
who arc affected by the externality, and to the extent that these differ-
ences in the distribution of welfare may significantly affect the aggre-
gate level of social welfare which is attained, the adoption of that
assignment of property rights in the generation of this externality for
which the costs of arranging a negotiated solution are a minimum may
not produce the highest practically attainable level of social welfare.
Consequently, in selecting an initial assignment of property rights in
the generation of any externality, it will generally be socially desirable
to attempt to balance the various costs of arranging a negotiated settle-
ment which are associated with the alternative assignments of property
rights which have been delineated against the prospective distributional
impacts of these alternative assignments. Nevertheless, obviously,
unless this balancing process is performed perfectly, the allocation of
resources which actually is achieved will differ from the most socially
desirable resource allocation which is practically attainable.
In addition, as the number of individuals who are affected by any
externality increases, the probability of attaining any mutually agree-
able negotiated settlement declines. Yet, the attainment of any mutu-
ally agreeable negotiated settlement will unambiguously provide a net
increase in welfare to society in the aggregate. Moreover, for any
net increase in aggregate welfare, there exists an infinite number of
distributions of this increase for which no member of society will
achieve a lower level of personal welfare than he would have attained
in the absence of a negotiated settlement. These alternative distribu-
tions of welfare are distingxushed by the magnitudes of the relative
shares of the aggregate increase in welfare which are obtained by the
various persons who are affected by the externality. Recognizing
opportunities for personal gain in a situation of this type, it becomes
individually rational for each of these persons tp attempt to obtain a
disproportionately large share of the aggregate increase in welfare for
himself by refusing to agree to any negotiated settlement which does
not contain a bias in the distribution of this aggregate increase which
is sufficiently favorable to him. However, if too many of the individ-
uals who are affected by the externality employ this strategy, it is
likely that there will exist no distribution of the aggregate increase in
welfare which will simultaneously satisfy the various distributional
constraints which have been imposed upon an acceptable settlement by
all of these individuals. Other things being equal, the probability that
this impasse will arise can be expected to increase as the number of
individuals who are affected by the externality increa'scs.
5.44
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Whenever this impasse is confronted, additional negotiations
will be required to induce relaxations of the various distributional con-
straints which are sufficient to permit-the attainment of a mutually
agreeable settlement. However, when these negotiations involve a
large number of people, the attainment of a mutually agreeable settle-
ment assumes many of the properties of a public good. In particular,
if any single individual relaxes the distributional constraint which he
imposes upon an acceptable settlement, he will generally provide only
a marginal increase in the probability of attaining a settlement which
is mutually agreeable to all of the individuals who are affected by the
externality. However, he will incur the cost of his negotiated decrease
in his share of the aggregate increase in welfare with certainty. There-
fore, since each person's acquiescence to a relaxation of his distribu-
tional constraint will provide for him only a small expected benefit at
a relatively high expected cost, it is individually rational for each
person to refuse to relax his distributional constraint. Clearly, if a
sufficiently large number of the persons who are affected by the exter-
nality adopt this strategy, the likely result will be a continued failure
to attain a mutually agreeable negotiated settlement. Moreover, if at
some point in time after this impasse develops, the individuals who
are affected by the externality determine that the expected incremental
cost of negotiating a mutually agreeable settlement exceeds the aggre-
gate increase in welfare which will be obtained if a settlement is suc-
cessfully negotiated, they will rationally choose not to engage in any
further attempts to negotiate a settlement. Hence, no modification in
the generation of the externality will be achieved.
However, as the number of individuals who are affected by the
externality decreases, the extent to which any single individual's relax-
ation of his distributional constraint will contribute substantially to the
probability of attaining a mutually agreeable negotiated settlement will
increase. Consequently, it will be more rational for each individual
who is affected by the externality to relax his distributional constraint;
and, hence, it will be more likely that mutual agreement to a modifica-
tion in the generation of the externality actually will be attained.
Therefore, a mutually agreeable negotiated settlement of an externality
problem is more likely to be achieved when only a small number of
individuals is involved in the externality situation than when large
numbers of persons are affected by the externality.
Finally, it will generally be possible to improve the prospect of
attaining a negotiated settlement of any externality problem substan-
tially by requiring less than unanimous approval of any proposal to
5.45
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modify the generation of the externality (i. e, , by eliminating the
requirement that the negotiated settlement must be mutually acceptable
to all individuals who are affected by the externality). Specifically,
requiring less than unanimous consent to any proposal of this type will
eliminate the possibility that a small portion of the individuals who are
affected by any externality will be able to preclude any modification of
the generation of the externality by refusing to accept any proposed
settlement which does not incorporate a distribution of the aggregate
increase in welfare produced by the modification which is extremely
biased in their favor. However, accepting less than the unanimous
consent of all individuals who are affected by any externality as author-
ization for the implementation of a negotiated settlement specifying the
permissible generation of the externality introduces the possibility that
this implementation will cause at least some of the individuals who
have declined to consent to the negotiated settlement to obtain lower
levels of personal welfare when the modification in externality gener-
ation'is performed than they would have obtained if the modification
had not been introduced.
Thus, eliminating the requirement of unanimous approval admits
the possibility that a negotiated settlement may produce changes in the
equilibrium allocation of resources which are not unambiguously socially
desirable. Yet, if the level of social welfare associated with the allo-
cation of resources which is attained in any externality situation as a
result of a less than unanimous negotiated settlement is greater than
the level of social welfare associated with the allocation of resources
which actually would have been attained in this same situation if unani-
mous consent had been required for the adoption of any negotiated
settlement, the acceptance of less than unanimous approval of a nego-
tiated settlement will be socially desirable in this situation. Neverthe-
less, in general, the allocation of resources which will be attained as
a result of a less than unanimous negotiated settlement can be expected
to deviate to some extent from the socially optimal resource allocation.
5.4.2 Information Requirements and
Information Retrieval Considerations
In comparison with other mechanisms for the control of external-
ities between private land uses, the information required for the admin-
istration of publicly negotiated settlements among all individuals who
are affected by an externality is extremely limited. In particular,
there is no need for any agency which is responsible for the adminis-
tration of settlements of this type to gather information, concerning the
5.46
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external costs which are attributable to the generation of any external-
ity. However, it is necessary that each individual'who is affected by
an externality must be aware of the costs which he will absorb himself
as a result of any modification in the generation of the externality, so
that he can either make appropriate offers to or appropriately accept
or reject offers from the other individuals who are affected by the
externality.
However, the administrative agency must collect sufficient infor-
mation to identify those externality situations for which it is socially
desirable to hold public hearings. Although conceivably a public hear-
ing could be convened for every externality situation, society must
incur some costs in conducting any hearing. Therefore, in general,
it will be socially undesirable to insist upon conducting a public hearing
in every externality situation. In particular, it is unnecessary to con-
duct public hearings in those situations in which the externality is
voluntarily controlled without public intervention by mutually agreeable
settlements among all individuals who are affected by the externalities.
Similarly, the conducting of public hearings will be socially undesir-
able in those externality situations in which the net increases in wel-
fare to be obtained by all members of society from the control of the
externalities are less than the costs of conducting these hearings.
Finally, public hearings may be socially undesirable in many external-
ity situations which involve large numbers of emitters and recipients
of the externality, where negotiations are unlikely to produce any
settlements providing for modifications in the generation of the exter-
nalities.
Consequently, to identify those externality situations in which
the conducting of public hearings may be socially desirable, it will be
necessary, in each externality situation, for the agency which is
responsible for the administration of the hearings to determine whether
private negotiations already have produced mutually agreeable settle-
ments concerning the control of the externality, to estimate the net
increase in welfare which society can expect to obtain as a result of
any negotiated settlement of the externality situation, to assess the
costs which the agency and all of the individuals who are affected by
the externality can expect to incur as a result of their participation in
a public hearing concerning the situation, and to evaluate the possibil-
ity that any acceptable settlement can be negotiated among the number
of individuals who are involved in the situation. Moreover, for each
externality situation in which the conducting of a public hearing is
determined to be socially desirable, it will be necessary for the
5.47
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administrative agency either to identify the property rights in the
generation of the externality which have been assigned to each of the
individuals who are affected by the externality or, if no assignment of
property rights has been established, to assign property rights to these
individuals in the manner described in Section 5.4. 1.
5.4.3 Potential Inequities, Abuses,
and Enforcement Problems
Especially, although not exclusively, when unanimous approval
is required for the adoption of a negotiated settlement, inequities can
arise whenever some of the individuals who are affected by an exter-
nality refuse to ratify any proposed settlement which does not incorpo-
rate a distribution of the net increase in aggregate welfare produced
by the settlement which is not sufficiently biased in their favor. At
the extreme, the adoption of this strategy by a large enough number of
the individuals affected by the externality can preclude the attainment
of any negotiated settlement and, hence, can deny to all of the individ-
uals who are involved in the externality situation the increase in social
welfare which could have been provided to them by a negotiated settle-
ment. Moreover, even when a negotiated settlement is successfully
attained, it is likely that the net increase in aggregate welfare pro-
duced by this settlement will be inequitably distributed in a manner
which is biased in favor of those individuals who have been most
intractable in the negotiation of the settlement.
Although the prospects of these inequities can be reduced by
eliminating the requirement of unanimous consent as authorization for
the implementation of a negotiated settlement, the relaxation of this
requirement introduces the possibility that some of the. individuals who
are affected by the externality will attain lower levels of personal wel-
fare with a negotiated settlement than they would have attained in the
absence of a settlement. Moreover, these inequities will be most
severe to the extent that the less than unanimous negotiated settlements
which are attained in different externality situations systematically
cause the same individuals to suffer decreases in their personal wel-
fare.
In addition, if any of the individuals who are affected by any par-
ticular externality fail to comply with the terms of the negotiated settle-
ment which has been attained in this externality situation (or, in the
absence of any negotiated settlement, with the stipulations of the pre-
vailing assignment of property rights), those individuals who are
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damaged by this lack of compliance will have to rely upon the judicial
system to compel adherence to the established degree of control of the
externality. However, litigation is costly in terms of both time and
resources; and the outcome of virtually any judicial proceeding is
uncertain. Consequently, inequities will arise if the adversely affected
individuals decline to pursue litigation because of this cost and uncer-
tainty; while abuses will occur if some individuals intentionally decline
to adhere to the established degree of control of the externality in the
belief that this behavior will not be challenged in court by the adversely
affected individuals because of this cost and uncertainty.
Moreover, even if litigation is initiated, it is unlikely that the
judicial systein will produce an adjudicated settlement which unambig-
uously promotes the attainment of social optimality. To guarantee the
provision of an adjudicated settlement of this type, the i^urt must have
access to accurate information specifying the increment;!.] costs which
will be incurred by each of the individuals who arc affected by the
externality as a result of any modification in the generation of the
externality. However, the provision of reasonably accurate estimates
of these costs will, in general, confront the same technical and motiva-
tional problems which arise in the provision of reasonably accurate
estimates of the external costs attributable to the performance of any
activity on any parcel of land which have been described in detail in
Section 5.1.2. Consequently, the estimates of these costs which will
be obtainable by the courts for any externality situation will necessarily
be relatively crude; and, as a result, the settlement which is estab-
lished by the courts in this situation is likely to cause some individuals
to suffer decreases in personal welfare.
Indeed, the prospect that this result will prevail is intensified
when relatively large numbers of individuals are involved in the exter-
nality situation because of the procedural rules which have been devel-
oped to determine any particular individual's eligibility to participate
in legal proceedings concerning a particular externality situation.
Although, conceivably, each adversely affected individual could bring
suit against each individual who has failed to adhere to the established
degree of control of the externality, a reduction in the cost of pursuing
litigation can be obtained by allowing all adversely affected individuals
to join together in initiating and maintaining this litigation. However,
the prevailing rules of joinder may affect the ability of these individuals
to adopt this strategy. Although the rules of joinder vary among states,
the potential impact of these rules can be assessed to a reasonable
extent by considering the Federal rule for joinder. This rule requires
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that the court must determine both that a common question of law or
fact is involved for each individual who wishes to join in the litigation
and that each of these prospective plaintiffs has a claim against each
defendent, before these prospective plaintiffs can be permitted to join
together in bringing suit.* Obviously, if the application of this rule
excludes any adversely affected individuals from participation in the
litigation, it is likely that the settlement attained in this litigation may
be inequitable at least with respect to these excluded individuals.
Moreover, additional prospects for the attainment of inequitable
adjudicated settlements arise when the number of individuals who are
affected by an externality becomes so large that joinder becomes
impractical. Under these circumstances, the legal mechanism for
the attainment of an adjudicated settlement of an externality situation
becomes the class action suit. A class action suit has been described
as providing:
"a means by which, where a large group of persons
are interested in a matter, one or more may sue, . .
as representatives of the class without needing to
join every member of the class. "#*
However, as a practical matter, the procedural rules which have been
established to control the initiation and maintenance of a class action
suit may severely limit the ability of this legal mechanism to promote
the attainment of social optimality. In particular, two recent decisions
have severely restricted the ability of class action suits brought before
Federal courts to establish unambiguously socially desirable controls
over externalities. First, in Zahn v. International Paper Company, ***
the court has ruled that, for an individual to bo included within a class
in a Federal class action suit, this individual must satisfy the Federal
jurisdictional amount requirement.**** This requirement states that
any entity which does not incur damages of more than $10, 000 as a
result of the generation of an externality cannot be included as a mem-
ber of the class in a Federal class action suit concerning the control
of the externality and, hence, must rely upon the state courts to adjudi-
cate its grievances. Obviously, this interpretation of the Federal
'•'Federal Rule of Civil Procedure §20.
**Wright (118), p. 306.
***414 u.S. 291 (1973).
****28 U.S.C. §1332 (a).
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jurisdictional amount requirement introduces the possibility that the
adjudicated settlements which are attained in Federal class action
suits may be inequitable at least with respect to those individuals who
are excluded from participation in these suits by the jurisdictional
amount requirement. Second, in Eisen v. Carlisle and Jacquelin, *
the Supreme Court has ruled that the plaintiffs representing a class in
a Federal class action suit must, at their own expense, individually
notify each and every member of the class whose name and address is
known or can be ascertained. Clearly, this requirement will increase
the cost of initiating any class action suit in the Federal courts and,
hence, may discourage the initiation of suits whose adjudicated settle-
ment would be socially desirable.
Similar problems arise in the adjudication of class action suits
in the state courts. Presently, there are three types of class action
statutes which have been enacted by the states. One type is modeled
after the current Federal class action rules,** which admits the pos-
sibility that state courts could also rule that individual notification of
all class members is required. If this ruling is adopted by any state
court, it is likely to preclude the initiation of some class action suits
whose adjudicated settlement would be socially desirable. In addition,
this type of class action statute provides that, in any class action suit,
all potential members of a class will be bound by the court decision
with respect to this suit unless they have "opted-out" of the litigation
by notifying the court of their intention not to be a member of the class.
This provision introduces the possibility that some individuals will be
involuntarily constrainted by court decisions resulting from litigation
of which they have been unaware and in which they would have had no
desire to participate.
The second type of class action statute which has been enacted
by some states is modeled after the old Federal class action rule,
which differs dramatically from the present Federal class action rule
to the extent that the old rule provides that, in any class action suit,
no potential members of a class will be bound by the court decision
with respect to the suit unless they have "opted-in" to the litigation.
This provision admits the possibility that some individuals will be
denied the benefits of an adjudicated settlement of an externality situ-
ation because they have been unaware of the proceedings which have
produced this settlement.
*94 S. Ct. 2140 (1974).
**Federal Rule of Civil Procedure §23.
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Finally, the third type of class action statute which has been
adopted by some states is modeled after the New York Field Code,*
which provides that, in any class action suit, all potential members of
a class will be bound by the court decision with respect to the suit if
the plaintiff represents the common interests of the class. This pro-
cedural rule permits the court to exercise substantial discretion about
the extent of applicability of its decision with respect to a class action
suit. However, in the absence of perfect knowledge on the part of the
court, it is unlikely that the adjudicated settlements attained under
this procedural rule will unambiguously promote the attainment of
social welfare in all cases.
Nevertheless, all three types of class action statutes which have
been enacted by the states do contain one common safeguard against
inequities and abuses. In no case can a class action suit be concluded
prioy to the establishment of a coui't decision without the approval of
the court. This restriction provides some protection against the pos-
sibility that the representatives of the class will make a deal with the
defendants in the litigation which is detrimental to the interests of the
remainder of the class.
5.4.4 Political Acceptability
The political acceptability of adopting publicly negotiated settle-
ments among all individuals who are affected by any externality as a
mechanism for the control of the externality is likely to be strongly
influenced by the particular assignment of property rights in the gen-
eration of the externality which is established as a basis for these
negotiations. An assignment of property rights which declares the
emitters of the externality to be fully liable for the damages attribut-
able to the externality will be supported by the recipients of the exter-
nality and opposed by the emitters of the externality; while an assign-
ment of property rights which absolves the emitters of any liability for
the damages attributable to the externality will be supported by the
emitters of the externality and opposed by the recipients of the exter-
nality. Whether either of these extreme assignments of property
rights, or any more moderate assignment of property rights, would
actually be politically acceptable within any particular jurisdiction
would necessarily depend upon the balance of political influence
between these two groups in the jurisdiction.
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Moreover, to the extent that the attainment of a negotiated settle-
ment in any externality situation vill require the transfer of direct cash
payments among different individuals who are affected by the external-
ity and to the extent that the constituents of a political jurisdiction con-
sider these direct cash payments to be socially undesirable bribes to
induce modifications in the generation of the externality (i. e. , either
payments to pollute or extortions extracted under threat of pollution),
publicly negotiated settlements among all individuals who are affected
by externalities is likely to be politically unacceptable within the juris-
diction in the absence of the exertion of considerable publ.ic relations
efforts by its proponents.
5.4.5 Expected Impacts on
Land Use Patterns
The expected impact of publicly negotiated settlements among all
individuals who are affected by externalities upon the pattern of devel-
opment in an area will be strongly influenced by the particular assign-
ment of property rights in the generation of externalities which is
established in the area. If the assignment of property rights which is
adopted in a region declares emitters of externalities to be completely
free of any liability for the damages attributable to these externalities,
the attainment of a negotiated settlement will require the recipients of
these externalities to offer inducements to the emitters to restrict
their generation of the externalities. Thus, under this assignment of
property rights, to preclude a modification in the pattern of develop-
ment in the region, it will be necessary for the existing residents of
the region to negotiate settlements with potential developers of the
region in which the existing residents induce the potential developers
to refrain from initiating their proposed projects. However, given the
large number of existing residents in any region who are likely to be
affected by the externalities which will be generated by any large-scale
project which is proposed, the negotiation of a settlement with the pro-
posed developers of a large-scale project to forestall the initiation of
the project will assume the properties of a public good for these exist-
ing residents. Therefore, under this assignment of property rights,
negotiated settlements to forestall the development of large-scale
projects will be achieved very infrequently; although negotiated settle-
ments might be successful in precluding the development of some
small-scale projects which generate externalities which adversely
affect only a limited number of the existing residents of the region.
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Conversely, if the assignment of property rights which is adopted
in a region declares emitters of externalities to be fully liable for the
damages attributable to these externalities, the attainment of a negoti-
ated settlement will require the emitters to offer inducements to the
recipients of the externalities to increase their absorption of the exter-
nalities. Thus, under this assignment of property rights, to produce
a modification of the pattern of development in the region, it will be
necessary for potential developers of the region to negotiate settle-
ments with the existing residents of the region in which the potential
developers induce the existing residents to accept the introduction of
their proposed projects. However, given the large numbers of existing
residents in any region who are likely to be affected by the externalities
which will be generated by any large-scale project which is proposed,
it is reasonably probable that a sufficiently large number of these exist-
ing residents will refuse to ratify any proposed settlement which is not
sufficiently biased in their favor to preclude the negotiation of any set-
tlement which permits the introduction of the proposed project. There-
fore, under this assignment of property rights, negotiated settlements
to permit the development of large-scale projects will be achieved
very infrequently; although negotiated settlements might be successful
in obtaining approval of the development of some small-scale projects
which generate externalities which adversely affect only a limited
number of the existing residents of the region.
Clearly, relative to the pattern of development which would have
existed in the absence of any control of externalities, the assignment
of full liability for the damages attributable to these externalities to
the emitters of these externalities will have a much more limiting
effect upon the pattern of development than will the assignment of no
liability for these damages to these individuals. Nevertheless, to the
extent that the negotiated settlements which are attained under any
assignment of property rights cause potential developers to recognize
external costs attributable to their proposed projects which they other-
wise would have ignored, these settlements will inhibit the introduction
of some projects which otherwise would have been undertaken. Yet,
conversely, to the extent that these negotiated settlements also reduce
the external costs which are incurred by those land uses which would
have been adversely affected by the projects whose introduction has
been inhibited, these negotiated settlements will encourage the expan-
sion of these land uses. Consequently, the net impact of publicly nego-
tiated settlements among all individuals who are affected by external-
ities upon the pattern of development and the aggregate rate of growth
of any region is essentially an empirical issue which cannot be resolved
purely on the basis of theoretical considerations.
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5. 5 Public Purchase of Scenic
or Environmental Easements
Under a system of property rights which assigns to the owner of
any parcel of land the right to use the parcel of land in any manner
•which he determines to be desirable, the unambiguous promotion of
the attainment of social optimality through the control of any external
effects which are attributable to an individual's use of his property
requires that the property owner must be adequately compensated for
any modifications of the permissible use of his property which are
required for the implementation of this control. That is, the property
owner must be paid compensation which is sufficient to guarantee that
he attains a level of personal welfare when these external effects are
controlled which is at least as great as the level of welfare which he
would have achieved if control had not been exercised. In addition, to
assure that no other member of society suffers a decrease in his per-
sonal welfare as a result of the control of these external effects, it
also must be true that both the total benefits which are obtained by all
of these other members of society as a result of this control equals or
exceeds the total costs which arc incurred by these individuals (includ-
ing the compensation which they pay to the owner of the property whose
use has been restricted) in implementing the control and the total
benefit which is obtained by each of these other members of society as
a result of this control is not less than the total cost which this individ-
ual incurs as a result of the implementation of the control.
Theoretically, all of these conditions can be fulfilled through the
public purchase of scenic or environmental easements, under which
the property owner surrenders the right to use his property in certain
specified ways in exchange for a monetary payment from the govern-
ment. However, numerous practical problems arise in attempting to
implement a public policy of purchasing scenic and environmental
easements which are likely to cause any actual purchase of a scenic
or environmental easement to produce an allocation of resources which
deviates from the socially optimal resource allocation.
5.5.1 Information Requirements and
Information Retrieval Considerations
For the public purchase of any particular scenic or environmental
easement to promote unambiguously the attainment of social optimality,
it must be true that the cost which is incurred by the property owner
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from whom the easement is purchased, as a result of the establish-
ment of the easement, does not exceed the net benefits which are
obtained by all other members of society as a result of the establish-
ment of the easement. Thus, conceptually, the cost incurred by this
property owner and the net benefits obtained by all other members of
society as a result of the establishment of the easement constitute the
lower and upper bounds, respectively, of the range of compensation
which could be paid for the easement while promoting the attainment
of social optimality.
Unfortunately, the estimation of the value of either of these
bounds is not easily performed. The net benefits obtained by all other
members of society as a result of the establishment of the easement
are equal to the discounted present value of the difference between the
external costs which will be incurred by all of these individuals during
each year in the future if the easement is not established and the
external costs which they will incur during each of these years if the
easement is purchased less the costs of negotiating the purchase of
and enforcing the property owner's compliance with the easement.
Although the negotiation and enforcement costs probably can be esti-
mated reasonably accurately, the estimation of the discounted present
value of the external costs which will be incurred with or without the
casement constitutes an extremely difficult task. In particular, the
technical and motivational problems in the estimation of the external
costs attributable to the performance of any activity on any parcel of
land which have been described in detail in Section 5. 1.2 will arise
once again in the determination of the appropriate compensation to pay
for a scenic or environmental easement. Consequently, the estimates
of external costs which are obtainable for even the current year will
necessarily be relatively crude. Moreover, because any individual's
estimate of his willingness to pay for the control of externalities
becomes more speculative as the time period for which this estimate
is provided lies further in the future, the estimates of external costs
which will be obtainable for years in the increasingly distant, future
will undoubtedly be even less reliable than the estimates which are
obtainable for the current year.
In addition, the discounting of these estimated future external
costs requires the determination of the appropriate interest rate at
which to perform this discounting. As explained in Section 5.3.2, this
determination will require the forecasting of the average interest rate
which will prevail in the market during each year in the future. The
inevitable imperfection of these forecasts will introduce additional
5. 56
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inaccuracies into the estimation of the net benefits which will be
obtained by all members of society, except the property owner from
whom this easement is purchased, as a result of the establishment of
a scenic or environmental casement.
The estimation of the cost which is incurred by the property
owner from whom the easement is purchased as a result of the estab-
lishment of the easement poses equally difficult problems. Theoret-
ically, this cost is equal to the amount of wealth which must be given
to this property owner to guarantee him the attainment of the same
level of personal welfare when the easement is established that he
would have obtained if the easement had not been established. Unfor-
tunately, there exists no general method of objectively measuring this
amount of wealth. If the property owner obtains the same satisfaction
from his utilization of his property with the easement that he would
have obtained without the easement, the amount of wealth which he
must be paid to maintain his level of personal welfare at the level
which he would have attained in the absence of the easement is equal
to the difference between the market value of his property without the
easement and the market value of his property with the easement.
However, if the property owner suffers a decrease in the satisfaction
which he obtains from using his property as a result of the establish-
ment of the easement (i.e. , if. he is restricted from performing activ-
ities which he personally enjoys and, hence, suffers a decrease in the
value which he personally attaches to the property) and if there exists
absolutely no substitutes for this property, the amount of wealth which
must be paid to this property owner is equal to the difference between
the market value of his property without the easement and the market
value of this property with the easement plus the difference between
the value which he personally attaches to the property without the case-
ment and his personal valuation of the property with the easement.
Finally, if the property owner suffers a decrease in his personal
valuation of his property as a result of the establishment of the case-
ment and if there exist reasonable substitutes for this property, the
amount of wealth which must be paid to this property owner is equal to
the difference between the market value of his property without the
easement and the market value of this property with the easement plus
the lesser of either the decrease in the property owner's personal valu-
ation of his property or the minimum for all reasonable substitute prop-
erties of the sum oC, first, the. total costs which the. property owner
must incur in moving from his present property to each substitute- prop-
erty and, second, the difference between the market value of this sub-
stitute property and the market value of his present property without
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the easement and, third, the difference between his personal valuation
of his present property without the easement and his personal valuation
of the substitute property.
Since the imposition of a formal constraint upon a property
owner's use of his own property cannot increase his personal valuation
of this property (because he could have imposed this constraint upon
himself informally if it would have increased the value which he per-
sonally attaches to the property) and since the property owner has
freely chosen to own his present property, it is clear that the differ-
ence between the market value of the property without the easement
and the market value of the property with the easement constitutes a
lower bound on the cost incurred by the property owner as a result of
the establishment of the easement. Consequently, in general, the
estimation of the actual value of this cost will require knowledge of the
property owner's personal valuation of his present property both with
and without the easement, the market value of this property both with
and without the easement, the property owner's personal valuations of
all reasonable substitute properties, the market values of these sub-
stitute properties, and the costs of moving from the owner's present
property to each of these substitute properties.
Reasonably accurate estimates of both the prevailing market
values of properties and the costs of moving can usually be obtained
from readily available data sources. However, the direct estimation
of the market value which will prevail for a property to which an ease-
ment will be applied after this easement has been established may be
severely constrained by society's lack of experience with the purchase
of less than fee simple interests in land. Yet, to the extent that the
constraints stipulated in easements are similar to the restrictions
contained in municipal zoning ordinances, reasonable estimates of the
effect of the establishment of an easement on the market value of prop-
erty should be inferable from evidence of the effect of similar zoning
restrictions upon the market values of similar properties. Therefore,
initially, it will generally be desirable to conduct statistical studies of
the relationship between zoning restrictions and the market values of
the properties to which these restrictions are applied and, then, to
utilize the results of these studies to estimate the expected effect of
the establishment of easements on the market values of the properties
to which these easements are applied.
Moreover, subsequently, as a community's experience with the
establishment of easements expands, it will be desirable to develop
data files which specify, for each property which is exchanged in the
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community, the market value which is established for the property in
that exchange, the restrictions upon the use of the property which are
stipulated in easements or other government regulations, the charac-
teristics of the property and its neighborhood which can be expected to
affect the property's market value, and the date on which the property
has been exchanged. After a sufficiently large number of exchanges
of property have been described in this manner in these data files, it
should be possible to conduct statistical studies of the relationships
among all of these variables which ultimately will permit the direct
estimation of the value which any property can be expected to command
in the market when any particular restrictive easement is applied to
the property.
Finally, it is necessary to obtain acceptable estimates of the
personal valuations which the owner of the property to which the ease-
ment will be applied attaches to various properties. Unfortunately,
the provision of adequate estimates of these personal valuations gener-
ally requires detailed knowledge of the property owner's tastes and
preferences -- knowledge which he normally will have no motivation
to divulge accurately to the administrative agency responsible for
purchasing scenic or environmental easements. Specifically, to the
extent that his revelations of his personal valuations of various prop-
erties might influence the payment which he receives for an easement,
it will be rational for him to overstate his personal valuation of his
property without the easement and to understate both his personal
valuation of the property with the easement and his personal valuations
of all alternative properties. Consequently, the obtaining of reason-
ably accurate estimates of the property owner's personal valuations
of properties may be impossible and, hence, the best obtainable esti-
mate of the cost incurred as the result of the establishment of an ease-
ment by the owner of the property to which the easement is applied
usually will be relatively crude.
5.5.2 Expected Deviations from
Social Optimality
The analysis developed in Section 5. 5. 1 clearly demonstrates
that, in general, it will be impossible to produce accurate estimates
of either the upper bound or the lower bound of the range of compensa-
tion payments which could be made for an easement while unambigu-
ously promoting the attainment of social optimality. Therefore, the
possibility generally exists that the payment which actually is made
for a scenic or environmental casement may fail to promote the
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attainment of social optimality. In particular, if the purchase of an
easement results from completely voluntary negotiations, the compen-
sation payment 'which actually is made may exceed the maximum pay-
ment which might conceivably promote the attainment of social optimality;
while if the purchase of an easement is effected through an actual or
threatened exercising of the power of eminent domain, the compensation
payment which actually is made may either exceed this maximum pay-
ment or fall short of the minimum payment which might conceivably
produce this result.*
Consequently, it is likely that, in some instances, the inaccurate
measurement of the costs and benefits which are attributable to the
establishment of scenic or environmental easements may precipitate
either the purchasing of unambiguously socially undesirable easements
or the failure to purchase potentially socially desirable easements. In
particular, inaccuracies in the estimation of the values of the costs
incurred by the owner of the property to which an easement is applied
and the net benefits obtained by all other members of society as a result
of (he establishment of this easement may produce a determination that
the net benefits attributable to the establishment of the easement exceed
the costs attributable to its creation when, in fact, the costs exceed
the net benefits. Errors in measurement of this type will precipitate
the purchasing of scenic or environmental easements whose establish-
ment necessarily is socially undesirable because, regardless of the
amount of compensation paid to the owners of the properties to which
the easements are applied, some member or members of society in-
evitably w'ill suffer decreases in personal welfare as a result of the
establishment of the easement. Similarly, inaccuracies in the estima-
tion of costs and benefits may, in some instances, produce a conclusion
that the costs attributable to the establishment of an easement exceed
the net benefits attributable to its creation when, in fact, the opposite
is true. Errors of measurement of this type will cause a failure to
*The compensation payment which actually is made when the pur-
chase of an easement is freely negotiated will never be less than the
minimum payment which might conceivably promote the attainment of
social optimality because a payment -which is less than this minimum
will cause the owner of the property to which the easement will be
applied to suffer a decrease in his personal welfare and, hence, will
be rejected by this property owner.
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purchase easements, whose establishment is potentially socially desir-
able and, hence, will cause all members of society to experience lower
levels of personal welfare than they simultaneously could have experi-
enced if the easements had been established appropriately.
Admittedly, socially undesirable consequences of both of these
types are reversible to the extent that any undesirable easements which
have been established can be sold back to the owners of the properties
to which they have been applied and any desirable easements which
have not been establishe'd can be purchased belatedly by the govern-
ment. However, society will suffer irrecoverable losses of aggregate
welfare throughout the time period during which these errors are not
recognized and corrected. Moreover, the possibility also exists that
any delay in the purchase of a potentially socially desirable easement
will permit the development of a use on the property to which the ease-
ment will apply whose initiation and discontinuation will require the incur
ring of costs which could have been avoided completely if the delay
had not occurred.
In addition, in those situations in which the establishment of a
scenic or environmental easement is potentially socially desirable,
inaccuracies in the estimation of the costs and benefits attributable to
the establishment of these easements may cause the compensation pay-
ments which are made to the owners of the properties to which the case-
ments are applied to be either inappropriately large or inappropriai.c-.ly
small and, hence, may cause the establishment of these potentially
socially desirable easements to incorporate- socially undesirable dis-
tributional effects. Specifically, if the compensation which actually is
paid for the establishment of a potentially socially desirable casement
exceeds the maximum payment which might conceivably promote the
attainment, of social optimality, some member or members of society
other than the owner of the property to which the easement is applied
will suffer decreases in personal welfare as a result of the purchase
of the easement. Conversely, if the actual compensation payment for
a potentially socially desirable easement is less than the minimum pay-
ment which might promote the attainment of social optimality, the
owner of the property to which the casement is applied will suffer a do-
crease in his personal welfare as a result of the establishment of the
easement. Neither of these effects if socially desirable so long as
individual preferences are weighted positively in the social welfare
function.
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Finally, even if the easement which is established in a particular
externality situation is potentially socially desirable and the compensa-
tion payment which is made for the easement is appropriate in the aggre-
gate, socially undesirable distributional effects might be produced by
the mechanism which is employed to finance the compensation payment.
For the purchase of an easement to promote unambiguously the attain-
ment of social optimality, the funds which are employed to finance its
purchase must be obtained from a revenue source which imposes upon
each member of society other than the owner of the property to which
the easement is applied a tax whose total value does not exceed the net
benefit which this member of society will obtain as a result of the
e stablishment of the easement. However, the difficulty of obtaining
any reasonably accurate estimates of this net benefit has been described
in detail previously in this section and has led directly to the conclusion
that any estimate of this net benefit which, in practice, can be produced
will Necessarily be relatively crude. Consequently, it will virtually
inevitably be impossible to guarantee that the tax mechanism which is
employed to finance the purchase of any scenic or environmental ease-
ment will unambiguously promote the attainment of social optimality.
Rather, in general, it is likely that this tax mechanism will cause
some members of society to suffer decreases in personal welfare as a
result of the purchase of the easement.
The analysis of scenic or environmental easements which has
been developed up to this point has implicitly assumed that the restric-
tions which are specified in these easements have already been deter-
mined. However, obviously, the extent to which any particular scenic
or environmental casement promotes the attainment of social optimality
will be strongly influenced by the nature of the restrictions upon develop-
ment which are specified in the easement. To promote unambiguously
the attainment of the socially optimal allocation of resources, an ease-
ment must restrict the generation of any particular adverse external
effect to that level at which, first, the incremental cost which is im-
posed upon society by the last unit of the externality which is actually
generated is equal to the incremental benefit which is obtained by
society as a result of the generation of this unit of the externality and,
second, for any increase in the generation of the external effect, the
incremental cost incurred by society exceeds the incremental benefit
obtained by society. To determine the level of generation of the exter-
nality which will fulfill these conditions, it is necessary to estimate
b_oth_the cost which the establishment of the easement will impose upon
the owner of the property to which the easement will be applied for each
level of restriction of the generation of the externality which might be
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specified in the easement an_d the net benefits which the establishment
of the easement will provide to all other members of society for each
of these levels of restriction. However, any attempt to obtain reason-
ably accurate estimates of these costs and benefits for any particular
level of restriction of the generation of the externality will confront all
of the theoretical and empirical problems which have been described
in detail in Sections 5. 1.2 and 5. 5. 1. Consequently, the estimates of
the incremental costs and incremental benefits of restricting the genera-
tion of the externality which, in practice, are obtainable will necessarily
be somewhat inaccurate. Therefore, it will almost inevitably be true
that the restrictions specified in any scenic or environmental easement
which actually is established will deviate _to some extent from those
restrictions whose inclusion in the easement would unambiguously pro-
mote the attainment of social optimality. Thus, the easements which
actually arc established will almost invariably provide a level and pat-
tern of externality generation which is socially suboptimal.
Moreover, even if the socially optimal level of externality genera-
tion can be unambiguously identified, the establishment of an easement
will not be capable of guaranteeing the attainment of this level of exter-
nality generation unless the conditions which must be fulfilled to assure
its attainment can be stipulated in a manner such that compliance with
these stipulated conditions by the activity performed on the property to
which the casement is applied can be monitored in a technically reliable
and economically feasible manner. Thus, if it is impossible to monitor
the generation of the externality directly and if the activities performed
on the property which can be monitored effectively are not appropriately
functionally related to the generation of the externality, it will be im-
possible to guarantee the attainment of the socially optimal level of
externality-generation through the establishment of a scenic or environ-
mental easement.
Finally, the establishment of a scenic or environmental easement
will, in many instances, be incapable of promoting the attainment of
social optimality because easements are essentially negative control
mechanisms. A scenic or environmental easement, at best, delineates
the maximum permissible level of externality generation which can be
performed on a parcel of land. However, it provides no direct incen-
tive to the owner of the property to generate a smaller quantity of the
externality if this change in externality generation is or becomes soci-
ally desirable. Thus, for example, although a change in technology
which reduces the cost of controlling the generation of an externality
may cause a decrease in the generation of the externality to become
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socially desirable, scenic or environmental easements contain no
mechanisms which will automatically permit the owners of the proper-
ties to which the easements are applied to acquire some portion of the
decrease in external costs which will be obtained by the remainder of
society if the technological change is introduced. Therefore, these
easements provide no motivation to these property owners to adopt this
socially desirable technology. Rather, if the technology is to be intro-
duced, the government must, first, become aware of its availability
and potential social desirability and, then, must negotiate restrictive
modifications of the existing easements to provide for the introduction
of the technology.
5.5.3 Potential Inequities, Abuses,
r.nd Enforcement Problems
Since both the decision to establish a scenic or environmental
easement on any property and the magnitude of the payment which is
made to the owner of the property to compensate him for the establish-
ment of the easement are directly related to the magnitude of the ex-
ternal costs which will be imposed upon society by the activity which
will be performed on the property in the absence of the easement, a
property owner can increase the return which he obtains from his pro-
perty by displaying a convincing interest in initiating activities upon
the property which will impose substantial external costs upon other
members of society when he has no actual interest in initiating these
activities. If, in this manner, a property owner successfully induces
the government to purchase an easement on his property which prohibits
the pursuit of an activity which the property owner would not have chosen
to initiate under the prevailing and foreseeable economic conditions in
the absence of the easement, an unnecessary expenditure of public
funds and, hence, a socially undesirable transfer of income from the
remainder of society to the property owner will have been performed.
Yet, the motivation clearly exists for property owners to adopt strate-
gies which might produce these results. Therefore, to protect society
from this form of bribery, any agency responsible for the purchase of
scenic or environmental easements should attempt to forecast through-
out the foreseeable future the expected use of each property to which
the application of an easement is being considered. Nevertheless,
unless this forecasting process is perfect, the possibility will exist
that the agency both might be induced to purchase some socially undesir-
able easements and might mistakenly choose not to purchase some
socially desirable easements.
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In addition, since, in many instances, the purchase of a socially
undesirable easement will provide an increase in wealth to the property
owner from whom the easement is purchased, motivations will exist
for this property owner to offer some portion of this increase in wealth
to the public official who is responsible for deciding whether to pxirchase
an easement on his property to induce this official to pxirchase the ease-
ment. To the extent that this bribery is successful, the public purchase
of scenic or environmental casements will cause some member of mem-
bers of society, other than the property owners from whom socially
undesirable easements are purchased and the public officials who have
accepted bribes, to suffer decreases in personal welfare as a result of
the establishment of these socially undesirable easements.
Moreover, additional inequities are likely to result from the public
pxirchase of scenic or environmental easements if an exercising of the
power of eminent domain is either performed or threatened to compel
or indxice the sale of an easement by any property owner. The legal
concept of "just compensation, " which determines the payment which
will be made to the property owner from whom an easement is purchased
in any eminent domain procc-edmg, employs as its basic appraisal stan-
dard the value for which a property might be expected to be exchanged
in the market. Therefore, if accurate estimates can be obtained of the
market value of the property to which the easement will be applied both
with and without the easement, the "just compensation" which will be
paid to the owner of this property for the establishment of the casement
will be equal to the difference between the market value of the property
without the easement and the market value of the property with the ease-
ment. However, as has been demonstrated in Section 5. 5. 1, this differ-
ence represents merely the losver bound on the amount of compensation
which mxist be paid to the property owner to gxiarantee that he will not
suffer a decrease in his personal welfare as a result of the establish-
ment of the easement.
Consequently, in general, the payment of legal "jxist compensa-
tion" to the owner of any property to which an easement is applied will
caxise the property owner to suffer a decrease in his personal welfare
as a result of the establishment of the easement. In fact, even if a
property owner accepts a payment in excess of the legal "jxist compen-
sation" in exchange for the establishment of an easement on his pro-
perty, this property owner may suffer a decrease in his personal wel-
fare as a resxilt of the e stablishment of the easement if the administra-
tive agency which is responsible for purchasing scenic or environmental
easements has warned him that the power of eminent domain will be
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exercised to compel the establishment of an easement on his property
if he refuses to accept a negotiated settlement. In this situation, it will
be rational for the property owner to accept any compensation which is
offered which exceeds the difference between the legal "just compensa-
tion" which he expects to receive if the easement is established as a
result of formal eminent domain proceedings and the costs which he
will incur if he participates in these formal proceedings -- even if the
compensation which is offered by the administrative agency is inadequate
to protect him against a decrease in his personal welfare.
Finally, inequities in the treatment of different property owners
can be produced by the inconsistent monitoring of the activities which
are performed upon the various properties to which easements are
applied. If these caseinents impose binding constraints upon the use of
the properties in the sense that they prohibit the owners of the proper-
ties from pursuing activities on their properties which they would have
performed in the absence of the easements, motivations will exist for
these property owners to increase the return which they obtain from
their property by violating the conditions specified in the easements.
Consequently, it will be necessary for the agency which is responsible
for the adininistration of the easements to monitor the compliance of
the activities performed on the properties to which the easements are
applied with the conditions specified in the easements. However, un-
less this agency monitors the activities which are performed on each
of these properties on a continuous basis, it is likely that inequities
will arise between property owners whose violations of the conditions of
their easements are not detected until a substantial period of time has
elapsed after the initiation of these violations, and property owners
who conscientiously adhere to the conditions specified in their ease-
ments. Moreover, since the violation of the conditions specified in any
eascnvnt will provide an increase in wealth to the owner of the property
to which the easement is applied, motivations will exist for the property
owner to offer some portion of this increase in wealth to the public
official who is responsible for monitoring the compliance of the activities
performed on his property with the conditions specified in the easement.
Therefore, it is conceivable that, in some situations, the inequities
associated with inconsistent monitoring will constitute intentional
abuses of the public policy of establishing scenic and environmental
easements rather than merely random aberrations of this policy.
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5. 5. 4 Legal Constraints and
Political Acceptability
If the establishment of a scenic or environmental easement involves
an exercising of the power of eminent domain, two legal conditions must
be fulfilled. First, the owner of the property to which the easement is
applied must be paid "just compensation" for the damage which he suf-
fers as a result of the establishment of the easement. Thus, it is uncon-
sitxitional for any public agency to establish an easement on any proper-
ty without paying the owner of the property compensation which is at
least equal to the difference between the market value of the property
without the easement and the market value of the property with the ease-
ment. Second, the constraints which are imposed upon the vise of the
property to which the easement is applied must serve a public purpose.
Therefore, any administrative agency which attempts to establish a
scenic or environmental easement throxigh an exercise of the power of
eminent domain must be prepared to demonstrate to the satisfaction of
the court the benefits which will accrue to society as a result of the
establishment of the easement.
Yet, those political jurisdictions which have already experimented
with the public purchase of scenic and environmental casements have
not encountered any substantial difficulties in the establishment of ease-
ments as a result of these legal requirements.* To the extent that these
favorable experiences are generally known, they should enhance the
political acceptability of the public purchase of scenic or environmental
easements in other political jurisdictions. Moreover, to the extent that
the purchase of scenic or environmentjil easements is considered to be
similar to other public purchases of real property (e.g. , the condem-
nation of fee simple interest in land under the power of eminent domain)
by the constituents of a political jurisdiction, the political acceptability
of the public purchase of these easements should be further improved.
However, to the extent that these constituents consider the use of public
funds to purchase scenic or environmental easements to be a lower
priority use of these funds than the financing of the provision of other
public services, the public purchase of easements may be less accept-
able politically than externality control policies which do not require
the payment of public funds to private individuals.
*See, for example, Penn (83).
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5. 5. 5 Expected Impact on
Land Use Patterns
To the extent that the establishment of scenic or environmental
easements will preclude the development of activities which otherwise
would have been introduced on the properties to which the easements
arc applied, growth will be restricted by the establishment of the ease-
ments. Conversely, to the extent that the decreases in external costs
which are attributable to modifications in the activities which are per-
formed upon the properties to which scenic or environmental easements
are applied induce an expansion of the development of other properties
in the region in which the easements have been established, growth will
be encouraged by the establishment of easements. Thus, clearly, the
public purchase of scenic or environmental easements can be expected
to alter the pattern of development in the region in which the easements
are established. However, the effect of the establishment of the ease-
ments upon the growth of this region in the aggregate invariably con-
stitutes an empirical issue which cannot be definitively resolved solely
on the basis of theoretical analysis.
The impact of the public purchase of scenic or environmental
ments upon the stability of land use will be. determined by the extent to
which the restrictions; specified iu the easements preclude the pursuit
of activities which actually would have been performed in the absence of
the easements. However, unless the easements which are established
require the discontinuation of activities which are already being per-
foritied on the properties to svhich these easements are applied, the
directly observable effects of the establishment of scenic or environ-
mental easements upon the stability of land use will be negligible.
5.6 Landowner Development Corporations
The attainment of the socially optimal allocation of resources is
severely threatened by the existence of externalities because the indi-
vidual resource owners whose activities generate these externalities
have no direct motivation to recognize or, more importantly, to incor-
porate into their decision-making processes the external costs which
these activities impose upon other members of society. However,
theoretically, these problems of unreconciled interdependencie s among
economic activities can be resolved through the merger of all of the
individuals who are affected by any externality into a single decision-
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making unit which has the authority to determine the allocation of all
resources which affect the generation of the externality. Since this
decision-making unit will obtain all of the gains associated with the
provision of a more socially desirable allocation of resources and will
incur all of the costs associated with the provision of a less socially
desirable allocation of resources in this externality situation, it will
be motivated to incorporate all of the costs and benefits attributable to
its activities into its resource allocation decisions and, hence, to pro-
vide an allocation of resources which unambiguously promotes the attain-
ment of social optimality.
The formation of a landowner development corporation constitutes
an attempt to apply this merger strategy to the control of those exter-
nalities which are generated by the activities performed on land. Con-
ceptually, by unifying within a single decision-making unit the authority
to control, the use of all of the parcels of land which might potentially
be involved in a particular externality situation, a corporation of this
type can be expected to incorporate appropriately into its decision-
making those interdependencie s among land use activities which cause
the unrestricted market to produce an economically inefficient and,
hence, socially suboptimal pattern of laud use. Specifically, since the
restriction of activities which generate external costs and the expansion
of activities which provide external benefits will increase the values
which the users and potential users of externally affected parcels of
land attach to these properties a_n_d_ since competition among these in-
dividuals will translate these increased personal valuations of these
properties into increased market values for these properties, the appro-
priate control of externalities by this corporation will produce total
returns to all of. the properties involved in the externality situation which
exceed the total returns which these properties would have earned in
the absence of the control of these externalities. If these additional
total returns exceed the total cost of establishing and administering the
landowner development corporation, this corporation simultaneously
can both unambiguously promote the attainment of social optimality
and provide an incentive for each of the individuals who are affected by
the externalities to become shareholders in the corporation (i.e. , trans-
fer control of the utilization of the properties involved in the externality
situation to the corporation in exchange for shares in the corporation)
by distributing the additional net returns earned by these properties as
a result of the corporation's control of externalities (i.e. , the additional
total returns earned by these properties in excess of the costs of ad-
ministering the corporation) among these individuals in a manner which
guarantees that none of the individuals experiences a lower level of
5.69
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personal welfare when the corporation controls the generation of exter-
nalities than he would have obtained in the absence of this control.
However, it is important to recognize that, to achieve this unam-
biguously socially desirable result, the landowner development corpora-
tion must perceive and appropriately incorporate into its decision-mak-
ing processes the costs and benefits which its decisions will generate
for all of the individuals who are involved in the externality situation.
Thus, to control effectively all of the externalities which arise from
the use of land, this corporation not only must promote the personal
welfare of all owners of developable property within the geographic area
in which the externalities arise, but also .must protect or advance the
interests of all other property owners and other individuals whose per-
sonal welfare is affected by the generation of the externalities. The
most direct method to assure that these conditions are fulfilled is to
include all of these individuals as shareholders in the corporation. Only
if each individual who incurs costs or obtains benefits in the externality
situation is included as a shareholder in the corporation is there any
automatic assurance that the personal welfare of all of these individuals
will be considered in the corporation's decision-making.
5.6. 1 Information Requirements and Expected
Deviations from Social Optimality
If all of the individuals who are involved in the externality situa-
tion are included as shareholders in the corporation, t);o appropriate
control of the externalities which are attributable to tho use of land
within the geographic area administered by the corporation can be per-
formed in a reasonably straightforward manner if the sole objective of
each of these shareholders is the maximization of the financial return
on his investment in the corporation. In this case, the objective of the
landowner development corporation is simply the maximization of the
total financial return earned by the property whose utilization it con-
trols. The information required to perform this maximization consists
of merely the reasonably predictable rental values which the properties
administered by the corporation will command in the market when each
of the various land use patterns which might be developed by the cor-
poration actually prevails, the cost of providing the private facilities
required to achieve each of these patterns of development, and the cost
of providing public facilities to serve each of these various land use
patterns (which the corporation will recognize and incorporate into its
dec is ion-making processes because the corporation pays all of the
property taxes which finance the provision of these facilities). Although
5. 70
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the practical difficulties associated with assembling and assimilating
this information in producing land use decisions undoubtedly will be con-
siderable, they should be no greater, and probably will be less, than
the problems which would confront any public agency which might
attempt to regulate the uncoordinated use of these properties by all. of
the individuals who are involved in the externality situation.
However, the complexity of determining the socially optima] allo-
cation of activities to parcels of land increases substantially in the
more common case where some of the individuals who are involved in
the externality situation are interested in maximizing the satisfaction
which they obtain from the use of land rather than just the financial
return which they earn on their investment in land. Under these cir-
cumstances, the appropriate control of the externalities arising from
the use of land requires not only information concerning the market
values of parcels of land when different patterns of development prevail,
the cost of providing the private facilities required for these patterns
of development, and the cost of providing public facilities to serve these
patterns of development; but also information concerning the personal
valuations which the various individuals who are involved in the exter-
nality situation attach to these different development patterns.
Whenever this information concerning persona] valuations is re-
quired, the landowner development corporation can adopt either of two
basic strategies to elicit this information for inclusion into its decision-
making processes. First, the corporation can develop a decentralized
decision-making structure which relies upon the attainment of negotiated
settlements among its shareholders to determine the socially optimal
pattern of development. However, any attempt to achieve an unambigu-
ously socially desirable privately negotiated settlement among all of
these shareholders will encounter precisely the same technical and
motivational difficulties which the analysis in Section 5.4 has demon-
strated will impede the attainment of unambiguously socially desirable
publicly negotiated settlements among all of the individuals who are
affected by any particular externalities. Alternatively, the corporation
can develop a centralized decision-making structure which relies upon
estimates of these personal valuations of patterns of development as
informational inputs into its determination of the socially optimal pat-
tern of development. However, any attempt to obtain reasonably
accurate estimates of these personal valuations will encounter precisely
the same technical and motivational difficulties which the analysis in
Section 5. 5.Z has demonstrated will inhibit the generation of reasonably
accurate estimates of personal valuations in the context of the public
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purchase of scenic or environmental easements. Consequently, under
either of these decision-making strategies, it is extremely unlikely that
the landowner development corporation will be successful in identifying
the socially optimal pattern of development.
Moreover, recognizing the large number of individuals who are
affected by many of the externalities which are attributable to the
development and use of land, it will frequently be impossible to enlist
all of these individuals as shareholders in a landowner development
corporation. Rather, it appears more likely that, at best, this cor-
poration will successfully attract as shareholders only those individuals
who own property or reside within the geographic area in which the
externalities are generated; and that, more frequently, it will succeed
in enlisting as shareholders only those individuals who own developable
property within this area.
Whenever a landowner development corporation fails to include
as shareholders all of the individuals who are involved in any externality
situation, the attainment of social optimality in this situation requires
that the corporation, in making its decision, must recognize and appro-
priately account for all external costs and benefits which its actions
impose upon individuals who are not shareholders in the corporation.
However, since the shareholders of the corporation will absorb all of the
costs and obtain none of the benefits associated with incorporating these
external costs and benefits into the corporation's decision-making pro-
cesses, these shareholders will have no direct motivation to encourage
the corporation to consider these external costs and benefits in its
decision-making. Therefore, unless the corporation behaves in a
manner which is inconsistent with the advancement of the interests of its
shareholders, the pattern of development which is established by the
corporation when it fails to include as shareholders all individuals who
are involved in the externality situation can be expected to deviate to
some extent from the socially optimal pattern of development.
5.6.2 Potential Inequitle s, Abuses,
and Enforcement Problems
If a landowner development corporation does not include as share-
holders all of the individuals who are affected by the externalities which
the corporation is attempting to control, the actions taken by the cor-
poration can, in general, be expected to provide increases in personal
welfare for its shareholders and to impose decreases in personal wel-
fare upon (or, at least, to fail to provide attainable increases in
5.72
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personal welfare to) those individuals who are involved in the externality
situation but are not shareholders in the corporation. Moreover, unless
the corporation initiates actions only on the basis of mutually agreeable
negotiated settlements among all of its shareholders, the actions taken
by the corporation can be expected to provide increases in personal wel-
fare to some of its shareholders and to impose decreases in personal
welfare to other shareholders in many instances. Thus, if the corpora-
tion relies upon either a decentralized decision-making process which
requires less than the wnanimous approval of all shareholders as authori-
zation for the initiation of any action or a centralized decision-making
process which bases its decisions upon unavoidably inaccurate estimates
of the personal valuations of its shareholders, some inequities can be
expected to be observed in the differential impacts which its actions have
upon the personal welfare of its various shareholders. In addition,
since the actions taken by the corporation (especially the distribution of
the additional net returns which arc earned, as a result of the corpora-
tion's control of externalities, by the properties whose utilisation is
controlled by the corporation) directly affect the wealth of the share-
holders of the corporation, motivations will exist for individual share-
holders to offer bribes to the administrators of the corporation to induce
these administrators to initiate actions which will increase their per-
sonal wealth -- regardless of the effect of ihese actions upon other
shar eholder s or other individxials who arc involved in the externality
situation. Obviously, if bribes of this type are accepted and acted upon
by the administrators of the corporation, systematic, intentional inequi-
ties will be established both among the shareholders of the corporation
and among all of the individuals who are involved in the externality
situation.
Finally, and more, importantly, it must be recognized that the
same consolidation of control which provides to a landowner develop-
ment corporation the power to internalize the externalities which arise
among the various land use activities within a geographic area also
provides to this corporation the power to exercise monopoly control
over the development of land in this area. Thus, in the absence of any
public regulation of its actions, a landowner development corporation
will be motivated to increase the net return which will be earned by the
property which it controls by taking advantage of the less than perfect
elasticity of the total market demand for this property. At the extreme,
if the corporation is capable of practicing perfect price discrimination
against all users of the property (i.e. , if it is able to identify and ex-
tract from each of these individuals the maximum amount of income
which this individual is willing to pay for the use of the property), the
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corporation will continue to provide the same economically efficient
pattern of development which it would have provided if it had not attempted
to exercise its monopoly power to any extent, but it also will produce
a substantial redistribxition of wealth from the users of its property to
the shareholders of the corporation. However, to exercise perfect price
discrimination, the corporation must acquire perfect knowledge of the
personal valuations which the various potential users of the property
attach to the different patterns of development which might be established
on the property. Yet, to the extent lha! these potential users realize
that their revelations of their personal valuations of these various pat-
terns of development will directly affect the amount of income which the
corporation will require them to surrender to obtain the right, to use
the corporation's property, these potential users will rationally under-
state their personal valuations of these patterns of development. Con-
sequently, it will inevitably be true, in practice, that the landowner
development corporation will be xmable to obtain sufficiently accurate
estimates of the personal valuations of the potential users of its pro-
perty to be able to practice perfect price discrimination against these
individuals.
Therefore, in general, the landowner development corporation
will discover that, to maximize the net return which can be earned by
its property in practice, it will be necessary to induce the users of the
property to make larger payments for the right to use the property by
restricting the development of the property below the level of develop-
ment which would have been undertaken in the absence of any exercise
of monopoly power. In particular, it will be possible to increase the
total net return which can be earned by the property be restricting its
development in a manner which will increase the return earned by the
portion of the property which the corporation continues to develop more
than it decreases the return earned by the portion of the property which
the corporation chooses not to develop. However, any restriction of
development of this type will be economically inefficient in the sense
that, relative to this restricted level of development, there will exist
some expansions of development for which some potential users of the
corporation's property would be willing to pay an amount of income in
excess of the cost which society must incur in performing the expan-
sion of development. Thus, hi general, the exercise of monopoly power
by a landowner development corporation will precipitate the socially
undesirable exclusion of some potential users from access to the
5.7.4
-------
property controlled by the corporation and, hence, will fail to promote
unambiguously the attainment of social optimality. #
To forestall this outcome, public regulation of the potentially
monopolistic behavior of the corporation will be required. For this
regulation to promote unambiguously the attainment of social optimality,
the public agency which is responsible for the administration of the
regulation must assemble and analyze sufficient information to identify
those instances in which the behavior of the landowner development
corporation is inconsistent with the attainment of the socially optimal
pattern of development of the property controlled by the corporation.
In general, this information will consist of essentially the same infor-
mation which would be required to develop a mechanism to control the
generation of externalities among the activities performed upon the
property directly. Consequently., there is no clear advantage associ-
ated with the public sector's permitting the formation of and, then,
regulating the behavior of a landowner development corporation in any
externality situation, instead of controlling the generation of external .tie s
directly in this situation. Rather, the relative social desirability of
these alternative public policies must be determined empirically by
balancing the comparative success of these policies in promoting the
development of socially desirable land use patterns against the compara-
tive levels of total cost which must be incurred in administering these
policies.
5.6.3 Legal Constraints and
Political Acceptability
The primary legal barrier confronting the formation of landowner
development corporations consists of the antitrust and antimonopoly
#These inequities will not arise if all individuals who might be
affected by the use of land within any geographic area -- including po-
tential residents and other potential users of land in the area -- are
included as shareholders in a landowner development corporation which
requires the mutual agreement of all shareholders as aut )rization for
the adoption of any decision which restricts development. Under these
circumstances, any individual who might be damaged by any exercising
of monopoly power will be able to forestall this exercising of monopoly
power. However, in practice, it appears to be extremely unlikely tha.t
any landowner development corporation could cither successfully enlist
all of these individuals as shareholders or establish a productive
decision-making process which contains such stringent safeguards.
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statutes of the Federal government and the various state governments.
If the courts' interpretations of these statutes consider the merger
within a single decision-making unit of the authority to control the utili-
zation of all property within a particular geographic area to constitute
the formation of an illegal combination in restraint of trade, the feasi-
bility of establishing landowner development corporations obviously
will be severely challenged.
Moreover, even if these legal barriers either prove to be illusory
or can be overcome, the formation of a landowner development corpora-
tion must be politically acceptable to the constituents of the political
jurisdiction in which its establishment is proposed before this jurisdic-
tion will permit its establishment. To the extent that these individuals
consider a landowner development corporation to constitute a unique
and unprecedented mechanism for the control of externalities, its politi-
cal acceptance by these constituents will require the exertion of sxib-
stantial public relations efforts by its proponents.
In addition, to the extent that the formation of a corporation of
this type can be expected to provide net benefits to some of these con-
stituents and to impose net costs upon other constituents, the overall
political acceptability of this control mechanism will be determined to
some extent by the relative political influence of those constituents who
will obtain net benefits from its adoption and those constituents who will
incur net costs as a result of its adoption. Thus, for example, if it is
perceived that the formation of a landowner development corporation
which includes as shareholders only the owners of property svithin a
particular political jurisdiction might exercise its control over the
development of property within the jurisdiction solely to the advantage
of its shareholders and, hence, to the disadvantage of the renters of
property within the jurisdiction, the overall political acceptability of
the formation of the corporation will be strongly influenced by the rela-
tive political influence of the property owners and renters in the politi-
cal jurisdiction. Clearly, under these circumstances it is impossible
to derive any general conclusions about the potential political accept-
ability of landowner development corporations in all political jurisdic-
tions .
5. 6. 4 Expected Impacts on
Land Use Patterns
To the extent that the actions taken by a landowner development
corporation reduce both the external costs which are generated by the
activities which are performed upon the property whyse utilization it
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controls and the cost of providing public facilities to serve the property,
these actions should encourage an expansion of development undertaken
on the property. Conversely, to the extent that the corporation exer-
cises its monopoly power to increase the net return earned by the pro-
perty which it controls, the actions taken by the corporation will restrict
development on the property. Consequently, the expected impact of the
formation of a landowner development corporation in any particular
area upon the overall rate of growth of the area constitutes an empirical
issue which cannot be resolved solely on the basis of theoretical analy-
sis. Nevertheless, it can be asserted that the more effective is the
government's regulation of the monopolistic tendencies of any landowner
development corporation, the greater will be the tendency of the land-
owner development corporation to take actions which will encourage the
overall growth of the area in which it operates.
In addition to affecting the overall level of development within a
geographic area, the formation of a landowner development corporation
can be expected to influence the pattern of development in the area.
In particular, the actions taken by any corporation of this type can be
expected to avoid the development of mixtures of land use activities
which impose substantial external costs upon its shareholders and to
expand the development of mixtures of land use activities which provide
substantial external benefits for these shareholders. Similarly, the
corporation can be expected to develop land use patterns which econo-
mize on the cost of providing public facilities to serve the activities in-
corporated within these patterns. Nevertheless, since the landowner
development corporation's primary objective is the maximization of the
net return earned by the property whose utilization it controls, it appears
unlikely that these modifications of the pattern of development will be
abrupt or destabilizing. Rather, the corporation can be expected to
perform these modifications in a coordinated manner calculated to pre-
serve and enhance these net returns.
5. 7 Required Payment by New Developments of
Full Additional Cost of all Public Facilities
If each property owner who develops his property is required to
pay the full additional cost of all expansions of public facilities which
must be provided to serve this development, a property owner will
choose to develop his property only if the total return which he expects
to obtain from this development exceeds the private cost which he incurs
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in performing the development by more than this full additional cost.
Conversely, he will choose to forego this development if this total return
exceeds his private development cost by less than this amount. Thus,
if either there exist no externalities between private land uses or those
externalities which do exist between private land uses have been opti-
mally controlled by other public or private actions, a policy which
requires the owners of new developments to pay the full additional cost
of all expansions of public facilities which must be provided to serve
these developments should induce property owners to introduce all land
use activities which will generate total returns in excess of the total
private and public costs of developing these activities, and should dis-
courage property owners from initiating any land use activities which
will generate total returns less than these total private and public costs.
Hence, if this requirement can be effectively implemented, this policy
should unambiguously promote the attainment of the socially optimal
pattern of development.
5. 7. 1 Information Requirements
Unfortunately, the effective implementation of the requirement
that the owner of any new development must pay the full additional cost
of all expansions of public facilities which must be provided to serve
this development is severely hampered by the empirical difficulties
associated with the estimation of this full additional cost. This estima-
tion would cause no problems if all public facilities could be expanded
in arbitrarily small increments such that the cost of providing each
incremental unit of any particular public facility is constant and each
incremental unit of each public facility provides services to only one
development. If these conditions were fulfilled, the attainment of the
socially optimal pattern of development could be unambiguously pro-
moted by merely determining the cost of providing an incremental unit
of each public facility and, then requiring property owners to pay a
price equal to this cost for each unit of the public facility which is pro-
vided to serve their developments.
However, these conditions generally are not fulfilled for public
facilities. Rather, the expansions of public facilities which must be
provided to serve particular new developments frequently are charac-
terised by indivisibilities in supply and jointness in consumption which
caus;c the provision of these additional public facilities to exhibit in-
creasing returns to scale. Although it is impractical to attempt to
enumerate all of the problems which can be expected to arise in the
estimation of the full additional cost of expanding each public facility
5. 78
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which is provided to serve each new development in any realistic situa-
tion in which increasing returns to scale prevail, a reasonable apprecia-
tion of the magnitude of these difficulties can be obtained from the con-
sideration of a simplified example.
Therefore, consider the problem of providing sewerage to serve
all of the land use activities which are developed within a particular
geographic area. Assume initially that all of these land use activities
are initiated simultaneously arid that the topographic characteristics
of the geographic area preclude the extension beyond this area of the
sewerage system which its installed to serve the developments within
the area. Although it probably would be technically feasible to install
a separate sewer line connecting each* of these developments to the
regional sewage treatment facility, it almost invariably will be possible
to attain a lower level of total cost in providing this same level of total
sewerage service to the geographic area by installing a unified system
consisting of a single trxuik sewer line with sufficient capacity to trans-
port all of the sewage generated by all of the developments in the area
to the regional sewage treatment facility and a set of smaller individual
sewer lines which connect each of these developments to the trunk
sewer line.
However, unfortunately, this unified sewerage configuration intro-
duces substantial complexity into the measurement of the full additional
cost of providing sewerage service to each of these developments.
Clearly, the cost of installing the individual sewer line which connects
any of these developments to the trunk sewer line constitutes a com-
ponent of the full additional cost of providing sewerage service to this
development; and, hence, this cost component constitutes a lower bound
upon the charge which must be imposed upon the owner of this develop-
ment in attempting to recover the full additional cost of providing the
development's sewerage service.
Yet, the provision of sewerage service to this development also
involves the installation of the trunk sewer line which serves all of the
developments in the geographic area; and the cost of installing the trunk
sewer line constitutes a component of (he full additional cost of provid-
ing sewerage service to all of these developments. Unfortunately, the
cost of installing the trunk sewer line is a joint cost of all of the develop-
ments which generally cannot be systematically allocated among the
developments in a manner which will unambiguously promote the 'attain-
ment of social optimality purely on the basis of the physical or tech-
nological characteristics of the sewerage system. Rather, to promote
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the attainment of social optimality, the cost of installing the trunk
sewer line must be allocated among the individual developments which
it serves in a manner which guarantees that the portion of this cost
which is allocated to each of the developments does not exceed the value
of the total benefit which the owner of the development obtains from the
provision of the trunk sewer line (i.e. , the difference between the value
of the total benefit which the property owner obtains from the provision
of its complete sewerage service and the cost of installing the individual
sewer line which connects his development to the trunk sewer line).*
For a property owner whose sole objective is the maximization of
the profit which he earns on his invc stmcnts, the value of the total
benefit which he obtains from the provision of this sewerage service
to his development is equal to the difference between the financial re-
turn which he would earn from this development if the sewerage service
were provided free of charge and the financial return which he would earn
from his best alternative investment opportunity. Similarly, for a
property owner whose objective is the maximization of his satisfaction
(e.g. , the owner-occupant of a residential property), the value of this
total benefit is equal to the difference between the consumer's surplus
which he would obtain from his development if the sewerage system
were provided free of charge and the consumer's surplus which he
would obtain from his best alternative market opportunity. Consequent-
ly, the determination of the upper bound on the portion of the total cost
of installing the complete sewerage system which can be imposed upon
the owner of each development which will be served by the sewerage
system while unambiguously promoting the attainment of social opti-
mality requires either the estimation of the revenues which will be
obtained and the costs which will be incurred by this property owner
from both this development and his best alternative investment oppor-
tunity if his sole objective is the maximization of his profit or the
estimation of the personal value which will be obtained and the costs
which will be incurred by this property owner from both this develop-
ment and his best alternative market opportunity if his objective is the
maximisation of his utility.
^Obviously, if an allocation of the cost of installing the trunk
sewer line which fulfills this condition can be developed, it will neces-
sarily be true that the total benefits which are obtained by all of these
developments as a result of the provision of this sewerage system will
exceed the total cost of providing the system; and, hence, the provision
of the sewerage system will unambiguously promote the attainment of
social optimality.
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Although, in general, it should be possible to obtain reasonably
accurate estimates of both the revenues which will-be generated by any
particular development or any other investment opportunity and the costs
which must be incurred in performing any particular development or
pursuing any other investment opportunity or market opportunity, tech-
nical and motivational problems may preclude the obtaining of any rea-
sonably accurate estimates of property owners' personal valuations of
either physical developments on real property or other market oppor-
tunities. The provision of adequate estimates of personal valuations
normally requires detailed knowledge of a property owner's tastes and
preferences -- knowledge which he commonly will have no motivation
to divulge accurately to the administrative agency responsible for the
provision and financing of sewerage services. Rather, to the extent
that his revelations of his personal valuation of either a particular
development or any other market opportunity can be expected to influ-
ence the charge which lie will be required to pay for the sewerage ser-
vices which serve the development, it will be rational for any property
owner to understate his personal valuation of the-development and to
overstate his personal valuations of all alternative market opportunities.
Consequently, the best obtainable estimate of the total benefit which
a utility maximizing property owner will obtain from the provision of
sewerage service to the development on his property visually will be
relatively crude; and, hence, it will almost invariably be impossible
to guarantee that any particular allocation of the cost of installing any
trunk sewer line will xmarnbiguoxisly promote the attainment of the
socially optimal pattern of development.
Moreover, the difficulties associated with obtaining adequate esti-
mates of the full additional cost of providing sewerage service to any
particular development which have been delineated in this example will
increase substantially in magnitude if the simplifying assumptions of
the simultaneous development of all properties served by the sewerage
facility and the impossibility of expanding the geographic area served
by this facility are relaxed. The relaxation of these assumptions intro-
duces the additional problems of predicting the nature, timing, and
pattern of the development which will occur within the geographic area
which might be served by the sewerage facility; determining the appro -
priate amount of excess sewer capacity to provide at any point in time
to support the anticipated future development; and establishing a socially
desirable policy for financing the provision of this excess capacity.
Despite the introduction of these additional problems, the xuiam-
biguous promotion of the attainment of social optimality still requires
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that the sewerage facilities which are installed in any area at any point
in time must be financed in a manner which imposes a charge upon the
owner of each development served by these facilities which does not
exceed the total benefits obtained by this property owner from the pro-
vision of these facilities fo his development. However, the information
which is required to guarantee that the provision of any particular
sewerage system will fulfill this condition is substantially greater than
the information which is required to serve this purpose in the more
restrictive situation which has already been analyzed. Specifically, in
this more realistic situation, it is necessary, first, to forecast both
the type of development which will be introduced upon each parcel of
land which will be served by the sewerage system and the point in
time at which this development will be introduced and, then, to estimate
the values of the previously described costs, revenues, and personal
valuations which can be expected to be associated with each of these
developments if the predicted nature and timing of the development
actually prevails. Therefore, the possibility of guaranteeing that any
particular allocation of the cost of installing a sewerage system will
unambiguously promote the attainment of social pptimality decreases
systematically as the complexity and reality of the situation in which
the sewerage system is being provided increases.
In addition, obviously, these same empirical difficulties will arise
to a greater or lesser extent in any attempt to determine an allocation
of the total cost of providing any other type of public facility (e.g. ,
mxmicipal water supply, public streets and roads, electricity generation
and distribution, telephone service, natural gas supply, solid waste
disposal, police protection, fire protection, or, even, educational ser-
vices) among the owners of all of the developments which are served
by the facility in a manner which will unambiguously promote the attain-
ment of the socially optimal pattern of development. Therefore, it will
generally be impossible to develop an allocation of the total cost of pro-
viding any public facility which can be uncontestably demonstrated to
promote unambiguously the attainment of social optimality.
Yet, if the value of the total benefits which are obtained by society
from the provision of any public facility exceeds the total costs which
are incurred by society in providing the facility, there will exist an
infinite number of different allocations of these total costs which will
unambiguously promote the attainment of social optimality. Therefore,
for any public facility whose provision generates total benefits whose
value to society is greater than the total cost of its provision, some
possibility exists that an unambiguously socially desirable allocation of
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this cost can be derived from the available information concerning the
value of the public facility to the owners of the developments which it
serve s.
5. 7. Z Expected Deviations from
Social Optimality
Nevertheless, for any allocation of the cost of providing a public
facility among the owners of the developments which are served by the
facility which has been established on the basis of less than perfect
information, there inevitably will exist some possibility than the im-
position of this cost allocation will exert some socially undesirable
influences upon the pattern of development. In particular, in the con-
text of the example developed in the preceding section, if the provision
of a certain sewerage system is financed through a cost allocation
which imposes upon each owner of a development which is served by
the system a charge which is equal to the cost of installing the individual
sewer line which, connects his development to the trunk sewer line, this
financing mechanism will precipitate the provision of a socially unde-
sirable sewerage system if the value of the total benefit which is ob-
tained by each of these property owners as a result of the provision of
the sewerage system exceeds the charge which is imposed upon this
property owner and if the total cost of providing the system exceeds the
value of the total benefits which arc obtained by all of these property
owners from the sewerage system.
Conversely, if the provision of the sewerage system is financed
through a cost allocation which imposes upon each of these property
owners a charge which exceeds (he cost of installing the sewer line
which connects his development to the trunk sewer line, this financing
mechanism will preclude the establishment of a socially desirable
development if the charge which is imposed upon the owner of this
development exceeds the value of the total benefit which he obtains from
the provision of sewerage service to the development and if the value
of this total benefit exceeds the cost of installing an individual sewer
line connecting his proposed development to the trunk sewer line and if
the value of the total benefits which are obtained by the owners of all
of the developments which are served by the sewerage system exceeds
the total costs of providing the system. Moreover, it is possible that,
in some instances, a financing mechanism of this type will simultaneous-
ly precipitate the provision of a socially undesirable sewerage system
and preclude the establishment of some developments winch are socially
desirable given that this sewerage facility has been provided. These
5.83
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results will be observed if the value of the total benefit which is obtained
from the sewerage system by each owner of a development which
eventually is served by the sewerage system exceeds the charge which
is imposed upon this property owner and if the value of the total benefit
which would have been obtained from the sewerage system by any
owner of a.property upon which development has been precluded by this
financing mechanism is both less than the charge imposed upon this
property owner and greater than the cost of installing an individual
sewer line connecting his prospective development to the trunk sewer
line and if the value of the total benefits which would have been obtained
from the sewerage system by all of the property owners whose individ-
ual developments are potentially socially desirable is less than the total
cost of providing the system.
Thus, in any realistic situation, the possibility clearly exists that
the adoption of any policy which attempts to require the owners of new
developments to pay the full additional cost of all expansions of public
facilities which must be provided to serve these developments will in-
duce the establishment of a pattern of development which deviates to
some extent from the socially optimal pattern of development.
5. 7. 3 Potential Inequities, Abuses, and
Enforcement Problems
Obviously, any allocation of the cost of providing an expansion of
a public facility which precludes the establishment of some socially
desirable developments will create inequities among the owners of the
various properties which might be served by this expansion to the ex-
tent that this cost allocation will deny potentially attainable benefits to
the owners of the precluded developments while permitting the owners
of those developments which are undertaken to retain at least some
portion of their potentially attainable benefits. In fact, even, if an allo-
cation of the cost of providing any particular expansion of a public
facility which unambiguously promotes the attainment of social opti-
mality is successfully imposed upon the owners of the developments
served by the expansion, this cost allocation might be considered to
be inequitable to the extent that it extracts from different property own-
ers different portions of the values of the total benefits which these
individuals obtain as a result of the expansion (e.g. , if it extracts all
of the values of these benefits from some property owners while per-
mitting other property owners to retain substantial portions of the
values of their benefits).
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Similarly, in any situation in which the timing of development
causes the provision of excess capacity of some public facility during
some time periods to be potentially socially desirable, the manner in
which the carrying costs associated with the provision of this excess
capacity are allocated among the owners of developments which arc
introduced at different points in time may create inequities in the treat-
ment of these property owners. In addition, since the particular
allocation of the cost of providing any expansion of any public facility
which is imposed upon the owners of the developments served by the
expansion will directly affect the wealth of these property owners,
motivations will exist for each of these property owners to offer induce-
ments to the public officials who are^re sponsible for the establishment
of this cost allocation to encourage the adoption of a cost allocation
which is favorable to his interest. Whether these inducements assume
the form of the direct payment of bribes or the oblique exercise of
political influence, if they are successful in producing a modification
of the allocation of the cost of providing the extension which is adopted
by these public officials, these inducements will necessarily affect
the equity of the manner in which the net benefit attributable to the
provision of the expansion are distributed among the owners of the
developments which it serves.
5. 7.4 Legal Constraints and
Political Acceptability
The legal constraints which can be expected to confront any politi-
cal jurisdiction which desires to implement a policy requiring the
owners of new developments to pay the full additional cost of all expan-
sions of public facilities which serve their developments can be inferred
from the legal constraints which presently confront political jurisdic-
tions which impose subdivision exactions upon property owners who
wish to subdivide their properties prior to development or sale. Es-
sentially, a subdivision exaction consists of a requirement that any
property owner desiring approval of a proposed subdivision plan must
either dedicate portions of his property to the municipality as sites for
public facilities pjr_ directly install certain public facilities upon his
property or make monetary payments to the municipality in lieu of
either the dedication of property or the direct installation of public
facilities before this approval will be granted.
To gain the approval of the courts, a subdivision exaction must
be determined to constitute a legitimate police power regulation. Thus,
the subdivision regulation which provides for the exaction must be
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authorized by enabling legislation and must reasonably promote the
health, safety, morals, or general welfare of the community upon which
the regulation is imposed. If the regulation fails to fulfill these require-
ments, the imposition of this subdivision exaction upon any property
owner will constitute a violation of the property owner's right to receive
just compensation for property which is confiscated by the government.
Under these circumstances, unless the court determines that the ex-
action actually has been performed voluntarily by the property owner, #
the property owner will be entitled to the reimbursement of any expendi-
tures which he has made in installing public facilities and the restitu-
tion of any property which he has dedicated to the municipality to satisfy
the invalid regulation.
Moreover, in addition to these police power requirements, two
other potential restrictions upon any political jurisdiction's ability to
imppse subdivision exactions should also be mentioned. First, if a
court which recognizes exclusionary tactics determines that the sub-
division exactions which are established by a municipality have been
designed to increase the cost of development so greatly that they will
effectively exclude a substantial number of prospective residents from
the municipality, the court may declare the exactions to be invalid.
Second, if the subdivision exactions which are imposed by a munici-
pality are determined by the court to be discriminatory in a manner
which violates the equal protection clause of either the Federal consti-
tution or the relevant state constitution, the exactions may be declared
to be invalid.
Nevertheless, despite these considerable legal requirements, the
courts have permitted political jurisdictions to impose subdivision
exactions in numerous situations. In particular, the courts have gen-
erally permitted municipalities to require a subdivider to improve the
streets within his subdivision and, then, to dedicate the improved
streets to the municipality. ## Moreover, a subdivider generally may
be compelled to supply sewerage, water, and drainage facilities to
serve his subdivision. In fact, some courts have declared that the
^Gregory Manor vs. City of Clifton, 53 N. J. Super. 482, 147
A.2d 595 (1959).
**See cases cited in Rathkop (81) at 71-55 n. 9.
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installation of these facilities by the subdivider may be required by the
municipality even in situations in which the subdivider must construct
some facilities outside of the boundaries of his subdivision to fulfill the
stipulations of the regulation.* Similarly, some cases have permitted
municipalities to require that telephone and electrical transmission
lines must be installed underground. **
However, the receptivenes s of the courts to the imposition of
subdivision exactions for either recreational or educational purposes
is less widespread. Some states have provided statutory authorization
for the dedication of land for recreational purposes;*** and, hence,
some courts have permitted municipalities to require the dedication of
land for these purposes.**** However, other states have provided
statutory authorization which merely permits political jurisdictions to
require subdividers to reserve land for recreational purposes so that
these political jurisdictions may eventually purchase this property by
exercising their power of eminent domain. ***** The mere reservation
of land does not require a subdivider to bear any significant portion of
the cost of providing a proposed recreational facility, since he will be
compensated for the value of the land which is reserved when the polit-
ical jurisdiction condemns the property.
Even greater difficxilties confront any attempt to impose subdivi-
sion exactions for educational purposes. In fact, in one New Jersey
case, the court has strongly indicated that all education facilities must
be financed by the general public. .Specifically, this court has declared;
It is the duty of the municipality to educate our citizenry;
to build schools, equip and maintain them for such purposes.
The'cost for public education, in a democratic society, must
*Johnson vs. Benbrook Water and Sewer Authority, 410 S. W. Zd
644 (Tex. Civ. App. 1967) and Rounds vs. Board of Water and Sewer
Commissioners. 347 Mass. 40, 196 N.E. 2d, 209 (1964>.
**Brazor vs. Borough of Mountainside, 55 N. J. 456, 262 A. 2d
857 (1970), and Sansoucy vs. Planning Board of Worcester, 246 N.E.
2d 811, 355 Mass. 647 (19^9).
***See, for example, Conn. Gen Stat. § 8-25.
****Billings Properties, Inc. vs. Yellowstone County, 144 Mont. 25,
394 P. 2d 182 (1964). See also the cases discussed in 43 A. L.R. 3d
862.
*****See, for example, Md. Gen. Laws Ann. § 66]3-26A.
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be borne by the public and the funds to be used for such pur-
pose must be raised by public taxation. ... It is my opinion
that any attempt to compel a developer to pay for building
a school, or to donate land for a school, as a condition prece-
dent to giving. . . . approval to a subdivision is violative of
his constitutional rights. *
Nevertheless, one court has permitted a municipality to require the
dedication of land for educational and recreational purposes. ••-f How-
ever, at the present time, it appears that no court has ruled upon a
case concerning a subdivision exaction requiring a subdivide!- to con-
struct an educational facility. Thus, case law will presently not sup-
port a subdivision regulation which requires a subdivider to build a
school upon his property.
Finally, one additional problem arises in the imposition of sub-
division exactions if a municipality desires to require a subdivider to
pay a fee in lieu of the dedication of land or the installation of a public
facility instead of requiring him to perform either of these other actions,
A fee of this type is not a general tax. Rather, it is more like a
special assessment. Consequently, like a special assessment, the
use of the fee must confer a special benefit upon the party from whom
it is collected, although it does not have to fulfill the constitutional
requirement of uniformity which a general tax must satisfy. The re-
quirement that the revenue obtained from the imposition of a fee in lieu
of the dedication of land must be used to benefit the property owners
from whom the fee is collected has precipitated the invalidation, of fees
of this type in some instances. For example, in Aunt Hack Ridge
Estates, Inc. vs. Planning Commission of Danbury, *# the court de-
clared a fee to be unconstitutional becaxise the revenues generated by
the fee were used to provide recreational facilities which would benefit
the entire community rather than just the property owners who were
required to pay the fee. Nevertheless, other courts have permitted
the imposition, of fees in lieu of the dedication of land when definite
standards have been established for the imposition of the fees and when
*Midtown Proper tie s, Inc. vs. Madison Township, 68 N. J. Super.
197, 172 A. 2d 40, 47, (1961).
**Jordan vs. Menomonee Falls, 28 Wis. 2d 608, 137 N. W. 2d 442
(1965).
***27 Conn. Supp. 74, 230 A. 2d 45 (1967).
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the facilities financed by the fees have been demonstrated to benefit
the individuals from whom the fees have been collected. * In fact, in
Jordan vs. Village of Menomonce Falls, ** the court has substantially
extended the range of circumstances in which the imposition of fees in
lieu of the dedication of land might be determined to be judicially accept-
able. In this case, the court has been confronted with a municipal
ordinance which permits the imposition of a fee of $200 per lot in lieu
of the dedication of land if this dedication is not feasible or compatible
with municipal plans. Part of the revenue generated by the imposition
of this fee is designated for the provision of recreational facilities;
while the remainder of this revenue is reserved for use by the school
district. The court has upheld the validity of this fee despite the
absence of any specific authorization for the imposition of a fee of this
type in any enabling legislation, on the grounds tiiat the fee constitutes
a necessary component of the municipality's dedication procedures.
Moreover, the court has also declared that, because payment of the
fee constitutes a requirement for subdivision approval, the fee is not
a tax and, hence, does not have to fxilfill the requirements which are
applicable to special assessments. Clearly, to the extent that courts
generally accept the precedents established in this decision, the range
of application of fees in lieu of the dedication of land will be greatly
expanded.
Nevertheless, this range of application will still be constrained
by the legal restrictions which limit the general ability of political
jurisdictions to impose any form of subdivision exaction. Consequently,
it appears unlikely that the imposition of fees in lieu of the dedication
of land will ever be legally capable of requiring the owners of new
developments to pay the full additional cost of all expansiojis of public
facilities which must be provided to serve these developments. Yet,
since the establishment of a new development, in general, will precip-
itate increases in both the assessed value of the properly on which
the development is established and, hence, the total property tax im-
posed upon this property, the sum of this increase in the total property
tax and any fees which can legally be imposed may permit the munici-
pality to recover a substantial portion of this full additional cost.
^Associated Home Builders vs. Walnut Creek, 4 Cal. 3d 633, 94
Cal. Rptr. 630, 484 P. 2d 606 (1971) and Jen ad, Inc. vs. Scar sd ale,
18 N. Y. 2d 78, 271 N. Y.S. 2d 955, Z18 N. E. 2d 673 (1966).
**28 Wis. 2d 608, 137 N.W. 2d 442 (1965).
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Yet, for a policy which requires owners of new developments to
pay the full additional costs of all expansions of public facilities which
must be provided to serve these developments to be adopted by a munici-
pality, the policy must be politically acceptable within this municipality.
Since the adoption of a policy of this type will provide net benefits to
some constituents of the municipality (e. g. , most taxpayers whose
total tax burdens will decrease as a result of the implementation
of the policy) and will impose net costs upon other constituents of the
municipality (e.g. , the owners of properties which are potentially
suitable for development), the political acceptability of any policy of
this type will be strongly influenced by the relative political influence
of those constituents who obtain net benefits from its adoption and those
constituents who incur net costs as a result of its implementation.
Moreover, the greater is the extent to which a comprehensive policy of
this type is considered by the constituents of a municipality to be simi-
lar to existing subdivision exaction requirements, the greater is the
likelihood that the policy will be acceptable to these constituents.
5. 7. 5 Expected Impacts Upon
Land Use Patterns
Since any policy which requires the owners of new developments
to pay the full additional costs of all extensions of public facilities
which must be provided to serve these developments imposes charges
only upon property owners who establish new developments, the initial
implementation of a policy of this type should not precipitate any sub-
stantial modifications in the prevailing land use pattern. Rather, to the
extent that the adoption of this policy causes the owners of properties
which are potentially suitable for development to recognize and incor-
porate into their decision-making costs which they would have ignored
in the absence of this policy, the policy will discourage the establish-
ment of some developments which otherwise would have been under-
taken. Thus, relative to the pattern of development which would have
prevailed in the absence of this policy, the adoption of this policy can
be expected to limit the overall rate of growth of the municipality in
which the policy has been established. Moreover, since the charges
imposed upon the owners of new developments under this policy can be
expected to discourage the e stablishment of developments which would
have competed with and, possibly, supplanted the land uses which have
been established prior to the adoption of this policy, the policy can also
be expected to increase the temporal stability of these pre-existing
land uses.
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5.8 The Most Appropriate Level of
Government to Implement Any Policy
Theoretically, it is most socially desirable to assign the responsi-
bility for the administration of any public policy to the lowest (i.e. ,
most local) level of government which has sufficient authority to exer-
cise effective control over all of the individuals who are involved in the
situation addressed by the policy. Assigning the administrative respon-
sibility for a public policy to any lower level of government necessarily
will prevent the agency to which the responsibility is assigned from
applying the policy to all of the individuals who are involved in the
situation which the policy addresses and, hence, will generally preclude
any possibility of attaining social optimality through the application of
the policy. Conversely, assigning this responsibility to any higher
level of government normally will decrease the responsiveness of the
administration of the policy to the interest of the individuals to whom
the policy is applied. Thus, theoretically, the re sponsibility for the
administration of a policy for the control of a particular externality
should be assigned to the lowest level of government which includes as
constituents all of the individuals who are affected by the externality;
while the responsibility for the adminintration of a policy concerning
the provision of a partic.ular public facility should be assigned to the
lowest level of government which includes within its jurisdiction all of
the parcels of land which might be efficiently served by a single pxiblic.
facility system of this type.
However, this theoretical rationale for the assignmc:nt of adminis-
trative responsibility ignores several practical considerations associ-
ated with the administration of public policies. First, the cost of
administering a public policy is not independent of the level of govern-
ment to which the responsibility for this administration is assigned.
Rather, since the assignment of the responsibility for the administra-
tion of any particular policy to successively higher levels of govern-
ment normall will systematically increase the complexity of the deci-
sion-making hierarchy which is required to perform this administration,
it can generally be expected that the cost of administering any particular
policy will increase as the level of government to which the responsi-
bility for this administration is assigned increases. Consequently, in
selecting the most appropriate level of government for the administra-
tion of any particular policy, it will generally be necessary to balance
the expected increase in the probability of attaining social optimality
which is associated with the assignment of the responsibility for the
administration of the policy to a higher, more comprehensive level of
5.91
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government against the increased cost of administering this policy which
will be precipitated by this reassignment of administrative responsibility.
Second, since the capabilities which are required to perform
the administration of any new policy may exhibit strong s imilarities to
the capabilities required for the administration of existing policies and
since the cost of initiating the application of the new policy is likely to
be substantially lower if the responsibility for its administration is
assigned to a level of government which has already assembled and
coordinated the capabilities required for this administration in its
administration of another policy than if this responsibility is assigned
to a level of government which has not yet developed these capabilities,
it c;m generally be expected that the total cost of administering any
particular policy will be lower if the responsibility for its administra-
tion is assigned to ; level of government v-hich has already developed
the capabilities required for this administration in another context than
if this responsibility is assigned to some other level of government.
Thus, in the context of the policies which have been analyzed in the
previous seven sections, comparative administrative advantages should
exist for the assignment of the responsibility for the administration of
a policy of ad valorem property taxation with tax rates conditional upon
land use to a level of government which already administers a standard
property tax policy and for the assignment of the responsibility for the
administration of the public purchase of scenic or environment ease-
ments to a level of government which already has substantial experience
with exercising the power of eminent domain and for the assignment
of the responsibility for the administration of a policy which requires
the owners of new developments to pay the full additional cost of all
expansions of public facilities which must be provided to serve these
developments to a level of government which already is responsible
for the provision of some of these public facilities. However, once
again, in selecting the most appropriate level of government for the
administration of any of these policies, it will generally be necessary
to balance the cost of administering the policy which is associated with
the assignment of the responsibility for this administration to any par-
ticular level of government against the expected probability of attaining
social optimality which is provided by this assignment of administrativc
responsibility.
Yet, it is impossible to perform this balancing of the relative
advantages and disadvantages of assigning the responsibility for the
administration of any of the previously analyzed policies to any partic-
ular level of government without detailed knowledge of both the technical
5.92
-------
characteristics of the externality or public facility situation to which
this policy will bo applied and the initial and ongoing administrative
costs which will be associated with any particular assignment of respon-
sibility for the administration of the policy. Unfortunately, the resource
constraints of this project have precluded the accumulation of this
detailed knowledge for even a small sample of political jurisdictions.
Moreover, even if this information were collected for a representative
sample of political jurisdictions for each of the previously analyzed
policies, it is unlikely that this sample information would support the
determination of a single optimal level of government for the administra-
tion on any particular policy in all situations. Rather, it is likely that,
because of differences in the technical characteristics of the various
externality or public facility situations to which a particular policy can
be applied or because of differences in. the administrative structures
of superficially similar public agencies in different political jurisdictions,
the most appropriate level of government for the implementation of any
particular policy will not be uniform across all situations in. which the
policy might be applied. In fact, it is conceivable that the responsibility
for the administration of most of the previoxisly analyzed policies in
any particular geographic area might appropriately be assigned simul-
taneously to several different levels of government. Thus, it might be
socially desirable to permit public agencies at several different levels
of government to purchase scenic or environmental easements simul-
taneously in the same geographic area or to assign the responsibility
for requiring the owners of new developments to pay the full additional
cost of expansions of different public facilities in a particular geo-
graphic area to public agencies at different levels of government (e.g. ,
to finance the provision of police and fire protection at the local level
of government, while financing the provision of sewerage service at
the regional level os government). However, the determination of the
most appropriate level or levels of government for the administration
of any particular policy in any particular situation will virtually in-
evitably constitute an empirical issue which cannot be resolved defini-
tively solely on the basis of theoretical considerations -- although
theoretical considerations might be able to limit substantially the range
of alternative levels of government to which this administrative respon-
sibility might be assigned.
5.93
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5. 9 Conclusions and Recommendations
The preceding analysis clearly demonstrates that, in any real-
istic situation, none of the policies evaluated in this chapter can rea-
sonably be expected to promote unambiguously the attainment of social
optimality. Therefore, it is extremely unlikely that the implementation
of any of the policies actually would result in the establishment of the
socially optimal pattern of development in any realistic situation.
However, the socially optimal pattern of development is a theo-
retical concept whose mere identification in any situation involving
either externalities or the provision of public facilities requires the
availability of perfectly accurate information concerning the tastes and
preferences of all utility-maximizing individuals who are affected by
the'situation, the revenue opportunities of all profit-maximizing individ-
uals who are involved in the situation, the cost conditions confronting
these utility-maximizing and profit-maximizing individuals both separate-
ly and in.combination, and the social welfare function of the community
in which the situation has arisen. Moreover, as the analysis in the
preceding sections has demonstrated, the obtaining of this perfectly
accurate information is, at best, costly and, for some items, theoreti-
cally impossible. Recognizing these practical difficulties in even
identifying the socially optimal pattern of development, it becomes
obvious that the development of any policy which will unambiguously
promote the attainment of this pattern of development will almost in-
evitably be impossible.
Consequently, it is obviously unreasonable to adopt as a neces-
sary condition for the implementation of any policy for the control of
externalities or the provision of public facilities a requirement that the
policy must unambiguously promote the attainment of the socially opti-
mal pattern of development. Rather, in making a decision concerning
the social desirability of developing and implementing any policy for the
control of externalities or the provision of public facilities, it is more
reasonable to base this decision upon the ability of the policy to pro r-
mote the attainment of a pattern of development which is more socially
desirable than the pattern of development whose attainment will be
promoted by any other policy which has been developed for the same
purpose.
On the basis of this criterion, it is possible to generate some
preliminary conclusions concerning the potential social desirability of
5.94
-------
impleinenting the various policies which have been evaluated in this
chapter, plowever, unfortunately, the resource limitations of this pro-
ject have precluded both the surveying .of political attitudes and the
measurement of public and private administrative costs which would be
required for the provision of a definitive recommendation concerning
the sotiial desirability of implementing each of these policies. Never-
theless, the theoretical analyses developed in this report do provide
sufficient information to support relatively strong conclusions concern-
ing the general social undesirability of implementing several of these
policies.
In particular, these analyses strongly suggest that the implementa-
tion of a policy of ad valorem property taxation with tax rates condi-
tional upon land use generally will be socially undesirable because any
realistic policy of this type can be expected in many instances to provide
incentives to property owner s which not only fail to encourage these
property owners to perform certain socially desirable actions, but
actually discourage these property owners from performing these
socially desirable actions. Moreover, this policy's requirement that
the total tax bill which is imposed upon any property to which a partic-
ular land use classification is assigned must be strictly proportional
to the assessed value of the parcel can reasonably be expected to cause
this policy to produce a pattern of development which is less socially
desirable than the pattern of development which would have been pro-
duced in the same situation by a more flexible policy for the control of
externalities.
Similarly, it will generally be socially undesirable to implement
a policy requiring the transfer of lump-sum payments for externalities
prior to changes in the permissible land use status of properties. The
extreme volume of information which is required for the development
and implementation of a policy of this type necessarily will cause the
cost of developing this policy in any realistic situation to exceed the cost
of developing many alternative policies for the control of externalities.
Moreover, the theoretical and practical, difficulties associated with
obtaining reasonably accurate estimates of a substantial portion of this
desired information inevitably will cause the structure of payments
which initially is embodied within a policy of this type in any realistic
situation to deviate sufficiently from the socially optimal structure of
payments that the implementation of the policy will produce a pattern
of development which is less socially desirable than the patterns of
development which would have been produced in this same situation by
some alternative policies with more modest information requirements.
5.95
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Finally, since a policy requiring lump-sum payments for externalities
requires the transfer of a payment only on those relatively infrequent
occasions when modifications of activity are initiated which entail
changes in land use classifications, the likelihood that the payments
which are initially specified in a policy of this type will be adjusted
appropriately to correct for initial errors in estimation can be expected
to be substantially lower than the likelihood that adjustments of this
type will be performed in policies which are applied on a regular peri-
odic basis. Thus, the social unde sir ability of adopting a policy requir-
ing lump-sum payments for externalities relative to alternative policies
for the control of externalities can be expected to increase, rather than
decrease, over time.
Next, it appears doubtful that it will be socially desirable to
establish a policy of convening public hearings involving all individuals
who are affected by particular externalities to promote negotiated
settlements of these externality problems. Public hearings of this type
are likely to be successful in producing unambiguously socially desir-
able negotiated settlements only in externality situations which involve
only a small number of individuals -- externality situations in which
private negotiations are also reasonably likely to produce mutually
agreeable and, hence, socially desirable settlements. However, in
externality situations which involve, relatively large numbers of individ-
uals, it is extremely likely either that no negotiated settlement will be
attained or, if less than the unanimous consent of all of the individuals
who are involved in the negotiations is required for the adoption of a
settlement, that the pattern of development which is produced by the
negotiated settlements which actually are adopted will not be any more
socially desirable than the patterns of development which would have
been produced in the same situation by some other policy for the control
of externalities.
Finally, the adoption of a policy encouraging the formation of
landowner development corporations will virtually inevitably be socially
undesirable because the formation of a landowner development corpora-
tion which is sufficiently comprehensive to control effectively the ex-
ternalities which arise among private land uses in a geographic area
necessarily will provide to the shareholders of this corporation sub-
stantial monopoly control over the development and use of land in this
area. Since the formulation of a public policy to regulate the corpora-
tion's exploitation of this monopoly power will require the accumulation
of the same information which will be required for the development of
a public policy to control the generation of externalities among private
5.96
-------
land uses directly, the formation of a landowner development corpora-
tion will provide no particular benefits for society and, hence, should
not be encouraged.
However, the remaining three policies which have been analyzed
in this chapter appear to exhibit sufficient potential as mechanisms for
the socially desirable control of externalities or the socially desirable
provision of public facilities to warrant further consideration for im-
plementation. In particular, both the imposition of annual "externality"
fees and the public purchase of scenic or environmental easements
offer sufficient flexibility in their tax and subsidy structures at any
point in time and sufficient adaptability of these structures over time
to present the possibility that the implementation of these policies will
produce increases in the social desirability of the pattern of develop-
ment in a geographic area which are large enough to justify incurring
the costs of developing and implementing these policies. Similarly,
a policy which attempts to require the owners of new developments to
pay the full additional cost of all expansions of public facilities which
must be provided to serve their developments should cause these prop-
erty owners to bear a sufficiently larger portion of this full additional
cost than they bear under the prevailing methods of financing the pro-
vision of expansions of public facilities to produce an increase in the
social desirability of the pattern of development in a geographic area
which is large enough to justify incurring the costs of formulating and
implementing this pricing policy.
Nevertheless, it is impossible to advance an unqualified recom-
mendation that any of these three policies should actually be applied in
any geographic area solely on the basis of the theoretical analyses
developed in this report. Rather, it will be necessary to perform
additional research into the administrative requirements, political
acceptability, and information processing needs of each of these policies
before an unqualified recommendation can be expressed concerning the
social desirability of adopting any of these policies.
5.9?
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91. Reps, John W. , "Pomeroy Memorial Lecture: Requiem for
Zoning, " Planning 1964, Chicago, Illinois, American Society of
Planning Officials, 1964.
92. Ripley, Wayne E. , Jr., Eric Cohen, and John R. Dwyer, Jr.,
"Environmental Land-Use Control: Common Law and Statutory
Approaches, " University of Miami Law Review, Vol. 28, Fall,
1973, pp. 135-208.
93. Roberts, M. J., "Environmental Protection: The Complexities
of Real Policy Choice, " Discussion Paper No. 378, Cambridge,
Massachusetts, Institute of Economic Research, Harvard Uni-
versity, August, 1974 (mimeograph).
94. Rossi, Vincent J. , Jr., "Inverse Condemnation and Nuisance:
Alternative Remedies for Airport Noise Damage, " Syracuse Law
Review, Vol. 24, No. 2, 1973, pp. 793-809.
95. Rueter, Frederick H. , "Externalities in Urban Property Mar-
kets: An Empirical Test of the Zoning Ordinance of Pittsburgh, "
Journal of Law and Economics, Vol. 16, October, 1973, pp. 313-
349.
96. Sagalyn, Lynne B. , and George Sternlieb, Zoning and Housing
Costs, Center for Urban Policy Research, Rutgers University,
New Brunswick, New Jersey, 1973.
97, Samuels, W. J. , "The Coase Theorem and the Study of Law and
Economics, " Natural Resources Journal, Vol. 14, January, 1974,
pp. 1-33.
98. Samuelson, P. A., "Aspects of Public Expenditure Theories,"
Review of Economics and Statistics, Vol. 40, November, 1958,
pp. 332-338.
99. Samuelson, P. A., "Diagrammatic Exposition of a Theory of
Public Expenditure, " Review of Economics and Statistics,
Vol. 37, November, 1955, pp. 350-356.
6.9
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100. Samuelson, P. A. , "Pitfalls in the Analysis of Public Goods, "
Journal of Law and Economics, Vol. 10, October, 1967, pp. 199-
204.
101. Samuelson, P. A. , "Public Goods and Subscription TV: Correc-
tion of the Record, " Journal of Law and Economics, Vol. 7,
October, 1964, pp. 81-83.
102. Samuelson, P. A. , "The Pure Theory of Public Expenditure,"
Review of Economics and Statistics, Vol. 36, November, 1954,
pp. 387-389.
103. Schall, L. D. , "Technological Externalities and Resource Allo-
cation, " Journa] of Political Economy, Vol. 79, September-
October, 1971, pp. 983-1001.
104. Sengstock, Frank S. , and John W. McAuliffe, "What is the Price
of Eminent Domain? An Introduction to the Problems of Valua-
tion in Eminent Domain Proceedings, " Journal of Urban Law,
Vol. 44, Winter, 1966, pp. 185-230,
105. Shoup, Donald C. , "Advance Land Acquisition by Local Govern-
ments: A Cost-Benefit Analysis, " Yale Economic Essays,
Vol. 9, Fall, 1969, pp. 147-207.
106. Siegan, Bernard H. , "Non-Zoning in Houston, " The Journal of
Law and Economics, Vol. 13, April, 1970, pp. 71-148.
107. Standard State Zoning Enabling Act, Washington, D.C., U. S.
Department of Commerce, Revised 1926.
108. Sussna, Stephen, "Zoning Boards: In Theory and In Practice, "
Land Economics, Vol. 37, February, 1961, pp. 82-87.
109. Turvey, R. , "On Divergencies between Social Cost and Private
Cost, " Economica, N.S., Vol. 30, August, 1973, pp. 309-313.
110. Tybout, R. A., "Pricing Pollution and Other Negative External-
ities, " Bell Journal of Economics and Management Science,
Vol. 13, Spring, 1972, pp. 252-266.
111. Urban Land Institute, The Effects of Large Lot Size on Residen-
tial Development, Technical Bulletin 32, Washington, D. C. ,
1958.
6. 10
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112. Vickrcy, W. S. , "Decreasing Costs, Publicly Administered
Prices, and Economic Efficiency, " in U. S. Congress, Joint
Economic Committee, Subcommittee on Economy in Government,
The Analysis and Evaluation of Public Expenditures; The PPB
System, Vol. 1, 91st Congress, 1st Session, 1969, pp, 119-148.
113. Wainwright, J. Kenneth, Jr., "Spring Valley: Public Purpose
and Land Use Regulation in a 'Taking' Context, " Environmental
Affairs, Vol. 3, No. 2, 1974, pp. 327-354.
114. Weld, J. , "Coase, Social Cost, and Stability: An Integrative
Essay, " Natural Resource s Journal, Vol. 13, October, 1973,
pp. 595-613.
115. Wellisz, S. , "On External Diseconomies and the Government-
Assisted Invisible Hand, " J|]c_onc>mic_a_, N.S., Vol. 31, November,
1964, pp. 345-362.
116, Winfield, P. H. , "Nuisance as a Tort, " Cambridge Law Journal,
Vol. 4, 1931, pp. 189-206.
117. Witheford, David K, , and George E. Kanaan, Zoning, Parking,
and Traffic, Saugatuck, Connecticut, Eno Foundation for Trans-
portation, 1972.
118. Wright, Charles Alan, Handbook of the Law of Federal Courts,
Second Edition, St. Paul, Minnesota, West Publishing Company,
1970.
6. 11
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6. 2 Legal Cases
1. Almota Farmers Elevator & Warehouse Co. v. United States,
409 U.S. 470 (1973).
2. Antonik v. Chamberlain, 81 Ohio App. 465, 78 N. E. 2d 752 (Ct.
App. Summit County 1947).
3. Arnovitch v. Levy, 238 Minn. 237, 56 N. W. 2d 570 (1953).
4. Arrien v. Levanger, 263 Or. 363, 502 P. 2d 573 (1972).
5. Associated Home Builders v^ Walnut Creek, 4 Cal. 3d 633, 94
Cal. Rptr. 630, 484 P. 2d 606(1971).
6. Aunt Hack R idge Estates, Inc. v. Planning Commission of
Danbury, 27 Conn. Supp. 74, 230 A. 2d 45 (1967).
7. Averne Bay Construction Co. v. Thatcher, 278 N.Y. 222, 15
N.E. 2d 587 (1938).
8. Baldwin v. McClendon, Al. , 288 So. 2d 761 (1974).
9. Bauer v, P. A. Cutri Co. of Bradford, 434 Pa. 305, 253 A. 2d
252 (1969).
10. Berman v. Parker, 348 U.S. 26 (1954).
11. Billings Properties, Inc. v. Yellowstone County, 144 Mont. 25,
394 P. 2d 182 (1964).
12. Boomer v. Atlantic Cement Co. , 26 N.Y. 2d219, 257 N. E. 2d
870, 309 N.Y.S. 2d 312 (1970).
13. Brazor v. Borough of Mountainside, 55 N. J. 456, 262 A, 2d 857
(1970).
14. Bureau of Mines of Maryland v. George's Creek Coal and Land
Co. , Md. , 321 A. 2d 748 (1974).
15. Campbell v. Seaman, 63 N.Y. 568(1876).
6. 12
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16. City of Searcy v. Robinson, 224 Ark. 344, 273 S.W. 2d 26 (1954).
17. Clifton Iron Co. v. Dye, 87 Ala. 468, 6 So. 192(1888).
18. Commonwealth v. Wyeth Laboratories, 12 Pa. Cmwlth Ct. 327,
315 A. 2d 648 (1974).
19. Cumberland Torpedo Co. v. Gaines, 201 Ky. 88, 255 S.W. 1046
(1923).
20. Dalehite v. United States, 346 U.S. 15, 44(1953).
2 1. Pooley v. Town Plan and Zoning Commission of Town of Fair -
field, 151 Conn. 304, 197 A. 2d 770 (1964).
22. Eisen v. Carlisle and Jacquelin, 945 S. Ct. 2140(1974).
23. Euclid v. Ambler Realty Co. , 272 U.S. 365(1926).
24. Golden v. Planning Board of Town of Ramapo, 30 N. Y. 2d 359,
334 N.Y.S. 138, 285 N. E. 2d 291 (1972).
25. Gregory Manor v. City of Clifton, 53N.J. Super. 482, ]47A.
2d 595 0959).
26. Haack v. Lindsay Light & Chemical Co. , 393111. 367, 66N.E.
2d 391 (1946).
27. Hadachek v. Sebastian, 239 U.S. 394(1915).
28. Hennessey v. Carmony, 50N.J. Eq. 616, 25 A. 374(1892).
29. Holman v. Athens Empire Laundry Co. , 149 Ga. 345, 351, 100
S.E. 207 (1919).
30. Jenad, Inc. v. Scarsda]e, 18N.Y. 2d 78, 271 N.Y.S. 2d 955,
218 N.E. 2d 673 (1966).
31. Johnson v. Benbrook Water and Sewer Authority, 410 S.W. 2d
644 (Tex. Civ.^pp. 1967).
32. Johnson v. City of Fairmont, 188 Minn. 451, 247 N.W. 577(1933).
6. 13
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33. Johnson v. Drysdale, 66S.D. 436, 285 M. W. 301(1939).
34- Jordan v. Village o£ Menomonce Falls, 28 Wis. 2d 608, 137 N.W.
2d 442 (1965).
35. Just v. Marinette County, 56 Wis. 2d 7, 201 N.W. 2d 761 (1972).
36. King County v. Farri, 7 Wash. App. 600, 501 P. 2d 612 (1972).
37. Lee v. Florida Public Utilities Co. , 145 So. 2d 299, 301 (Fla.
App. 1962).
38. Lind v. City of San Luis Obispo, 109 Gal. 340, 42 P. 437 (1895).
39. Mayrne Riley v. District of Columbia Redevelopment Land Author-
ity. 246 F. 2d 641 (B.C. Cir. 1957).
40. Midtown Properties, Inc. v. Madison Township, 68 N,J. Super.
197, 172 A. 2d 40, 47 (1961).
41. Miller v. Beaver Falls, 368 Pa. 189, 82 A. 2d 34 (1951).
42. Morris County Land Improvement Co. v. Township of Parsippany-
Troy Hills. 40N.J. 539, 193 A. 2d 232 (1963).
43. Nestle v. City of Santa Monica,' 6 Cal. 3d 920, 496 P. 2d 480,
101 Cal. Rptr. 568 (1972).
44. Ocean County v. Stockhold, 129 N.J. Super. 323 A. 2d 515 (1974).
45. Qetjen v. Goff Kirby Co. , 38 Ohio L. Abs. 117, 124, 49 N. E. 2d
95 (Ct. App. Cuyahoga County 1942).
46. Patton v. Westwood Country Club. 18 Ohio App. 2d 137, 247
N.E, 2d 761 (1969).
47. Pennsylvania Coal Co. v. Mahon, 260 U.S. 393(1922).
48. Pennsylvania Coal Co. v. Sanderson, 113 Pa. 126, 6 A. 453(1886).
49. Reid v. Architectural Board of Review, 119 Ohio App. 67, 192
N.E. 2d 74 (1963).
6. 14
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50. Riblet v. Spokane Portland Cement Co. , 41 Wash. 2d 249, 248
P. 2d 380 (1952).
51. Roble v. Lillis, 112 N. H. 492, 299 A. 2d 155 (1972).
52. Rounds v. Board of Water and Sewer Commissioners, 347 Mass.
40, 196 N.E. 2d 209 (1964).
53. Sansoucy v. Planning Board of Worcester, 246 N.E. 2d811, 355
Mass. 647 (1969).
54. State ex rel Saveland Park Holding Corp. v. Wieland, 269 Wis.
262, 69 N.W. 2d 217 (1955).
55. State v. Johnson, 265 A. 2d 711 (Me. 1970).
56. Stevens v. City of Salisbury, 240 Md. 556, 214 A. 2d 775 (1964).
57. Sullivan v. Jones & Laughlin Steel Co. , 208 Pa. 540, 57 A. 1065
(1904).
58. Township of Bedminster v. Vargo Dragway, Inc. , 434 Pa . 100,
253 A. 2d 659 (1969).
59. Turnpike Realty Co. v. Town of Dedham, 284 N. E. 2d891
(Mass. 1972).
60. Vernoa Park Realty Co. v. City of Mount Vernon, 307 N. Y. 493,
121 N.E. 2d 517 (1954).
61. Wente v. Commonwealth Fuel Co. , 232111. 526, 83 N.E. 1049
(1908),
62. Wes Outdoor Advertising Co. v. Goldberg, 55 N.J. 347, 262 A.
2d 199 (1970).
63. West Kentucky Coal Co. v. Rudd, 328 S.W. 2d 156 (Ky. 1959).
64. Whaland v. Union Bag & Paper Co. , 208 N.Y. 1, 101 N.E. 805
(1913).
65. Zahn v. International Paper Company;. 414 U.S. 291 (1973).
6. 15
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6.3 Other References
6. 3. 1 Market Failure
6.3. 1. 1 General
Bator, F. M. , "The Anatomy of Market Failure, " Quarterly Journal
of Economics, Vol. 72, August, 1958, pp. 351-379.
Baumol, W. J. , "Environment Protection at Minimum Cost, " American
Journal of Economics and Sociology, Vol. 30, No. 4, October,
1971, pp. 337-344.
Beza, S. T. , and K. E. Knorr (and others), "Economics and Govern-
ment Expenditures: Discussion, " American Economic Associa-
tion. Papers and Proceedings. Vol. 49, May, 1959, pp. 377-383.
Broussalian, V. L. , "Non-Marketability and Public Expenditure Theory, "
Public Finance, Vol. 27, No. 1, March, 1972, pp. 9-24.
Brownlee, O. H. , "Using Market Mechanisms in Making Government
Expenditure Decisions, " American Economic Association, Papers
and Proceedings, Vol. 49, May, 1959, pp. 359-367.
Csikos-Nagy, B. , "Uses and Limits of the Markets in Government-
Coordinated Economies, " PjabJ1iLc_Pj.nanc_e, Vol. 26, No. 2, 1971,
pp. 329-347.
Dasgupta, P. , and J. Stiglitz, "On Optimal Taxation and Public Pro-
duction, " Revieu^_of__Ec_^n_orni^_Sjtu^j^^ Vol. 39, No. 1, January,
1972, pp. 87-103.
Davis, O. A., and A. B. Whinston, "Some Notes on Equating Private
and Social Cost, " Southern Economic Journal, Vol. 32, October,
1965, pp. 113-126.
Due, J. F. , and W. L. Holmes, "Evaluation of Government Investment
Projects. " Public Finance, Vol. 22, No. 3, 1967, pp. 255-263.
Feldman, P. , "Efficiency, Distribution and the Role of Government in
a Market Economy, " Journal of Political Economy, Vol. 79,
No. 3, May-June, 1971, pp. 508-526.
6.16
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Feldstein, M. S. , "Choice of Technique in the Public Sector: A Simpli-
fication, " Economic Journal. Vol. 80, No. 320, December, 1970,
pp. 985-990.
Fisher, A. C. , J. V. Krutilla, and C. J. Cicchetti, "The Economics
of Environmental Preservation: A Theoretical and Empirical
Analysis, " American Economic Review, Vol. 62, No. 4,
September, 1972, pp. 605-619.
Fishlow, A. , and P. A. David, "Optimal Resource Allocation in an
Imperfect Market Setting, " Journal of Political Economy. Vol. 69,
December, 1961, pp. 529-546.
Green, M., and B. J. Moore, Jr., "Winter's Discontent: Market
Failure and Consumer Welfare, " Yale Law Journal, Vol. 82,
No. 5, April, 1973, pp. 903-919.
Hahn, F. H. , "On Optimum Taxation, " Journal of Economic Theory,
Vol. 6, No. 1, February, 1973, pp. 96-106.
Harkin, D. A. , "The Decision for Public or Private Ownership of
Resources, " Land Economics, Vol. 48, No. 2, May, 1972,
pp. 144-150.
Hicks, U. K. , "Epilogue: Choice, Efficiency, and Control in the Public
Services, " Scottish Journal of Political Economy, Vol. 10,
February, 1963, pp. 146-163.
Hurwicz, L. , "The Design of Mechanisms for Resource Allocation, "
American Economic Review, Vol. 63, No. 2, May, 1973, pp. 1-30.
Jurgensen, H. , "Private and Social Costs, " German Economic Review,
Vol. 2, No. 4, 1964, pp. 273-288.
Lerner, A. P. , "On Optimal Taxes With an Untaxable Sector, " Ameri-
can Economic Review, Vol. 60, No. 3, June, 1970, pp. 284-294.
Margolis, Julius, ""Welfare Criteria, Pricing, and Decentralization of
a. Public Service, " Quarterly Journal of Economics. Vol. 71,
August, 1957, pp. 448-463.
McKean, R. N. , "Divergencies Between Individual and Total Costs
Within Government, " American Economic Association, Papers
and Proceedings, Vol. 54, May, 1964, pp. 243-249.
6.17
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Mishan, E. J. , "E. J. Mishan: A Reply to Professor Worcester, "
Journal of Economic Literature, Vol. 10, No. 1, March, 1972,
pp. 59-62.
Mishan, E. J., "A Survey of Welfare Economics, 1939-1959 [With
Bibliography], " Economic Journal. Vol. 51, September, 1961,
pp. 197-265.
*
Mohring, Herbert, "Alternative Welfare Gain and Loss Measures,"
Western Economic Journal, Vol. 9, No. 4, December, 1971,
pp.. 349-368.
Mushkin, Selina (ed. ), Public Prices for Public Products, Washington,
D.C., The Urban Institute, 1972.
Petto, A. C. , "Issues in Public Expenditures: Further Considerations,"
Review of Social Economy, Vol. 29, No. 2, September, 1971,
pp. 251-257.
Pryor, F. L. , "Elements of a Positive Theory of Public Expenditure, "
Finanz-Archiv. N. F. Vol. 26, December, 1967, pp. 405-430.
Public Finances: Needs, Sources, and Utilization, Conference No. 12
of the Universities-National Bureau Committee for Economic
Research, Princeton, New Jersey, Princeton University Press,
1961.
Shibata, B. , "Pareto-Optimality, Trade, and the Pigovian Tax, "
Economica. N.S., Vol. 39, No. 154, May, 1972, pp. 190-202.
Tinbergen, J. , "Welfare Economics and Management of Public Enter-
prises ," Ajinjulj3_oXJ^u_bric_am^ Vol. 35,
April-September, 1964, pp. 99-106.
6. 18
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Tipping, D. G. , "Consigners' Surplus in Public Enterprise, " Man-
chester Schoo] of Economics and Social Studies, Vol. 34,
September, 1966, pp. Z21-245.
U. S. Congress, Joint Economic Committee, Subcommittee on Econ-
omy in Government, The Analysis and Evaluation of Public
Expenditures: The PPB System. 3 volumes, Washington, D.C.,
U. S. Government Printing Office, 1969.
6.3.1.2 Externalities
Aoki, M. , "Marshallian External Economies ami Optimal Tax-Subsidy
Structurc, " Economctrica, Vol. 39, No. i, January, 1971,
pp. 35-53.
Aoki, M. , "Two Planning Processes for an Economy with Production
Externalities, " International Economic Review, Vol. 62, No. 3,
June, 1972, pp. 307-322.
Ayres, R. U. , and A. V. Kneese, "Production, Consumption, and
Externalities."American Economic Review, Vol. 59, No. 3,
June, 1969.
Bagley, E, S. , "Water Rights Law and Public Policies Relating to
Ground Water "Mining1 in the Southwestern States, " Journal of
Law and Economics, Vol. 4, October, 1961, pp. 144-174.
Barnett, A. H. , and B. J. Yandle, Jr. , "Allocating Environmental.
Resources. " Public Finance, Vol. 28, No. 1, 1973, pp. 11-19.
Bell, F. W. , "Technological Externalities and Common-Property
Resources: An Empirical Study of the U. S. Northern Lobster
Fishery. " Journal of Political Economy, Vol. 80, No. 1,
January-February, 1972, pp. 148-158.
Bohm, P. , "Pollution, Purification and the Theory of External Effects, "
Swedish Economic Journal, Vol. 72, No. 2, June, 1970, pp. 153-
166.
6.19
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Boyd, J. H. , "Joint Products, Collective Goods, and External Effects:
Comment, " Journal of Political Economy. Vol. 79, No. 5,
September-October, 1971, pp. 1119-1128.
Bradford, D. F. , "Joint Products, Collective Goods, and External
Effects: Comment, " Journal of Political Economy, Vol. 79,
No. 5, September-October, 1971, pp. 1119-1128.
Bragdon, C. , "The Community Noise Problem: Factors Affecting its
Management, " Natural Resources Journal. Vol. 10, No. 4,
October, 1970, pp. 687-718.
Buchanan, J. M. , "External Diseconomies, Corrective Taxes, and
Market Structure, " American Economic Review, Vol. 59, No. 1,
March, 1969.
Buchanan, J. M. , "The Institutional Structure of Externality, " Public
Choice. Vol. 14, Spring, 1973, pp. 69-82.
Buchanan, J. M. , "Joint Supply, Externality, and Optimality, "
Economica. N.S., Vol. 3, November, 1966, pp. 404-415.
Burrows, P. , "Nuisance: The Law and Economics, " Lloyds Bank
Review, No. 95, January, 1970, pp. 36-46.
Burrows, P. , "On External Costs and the Visible Arm of the Law, "
Oxford Economic Papers, Vol. 22, No. 1, March, 1970, pp. 39-
56.
Camacho, A., "Externalities, Optimality and Informationally Decen-
tralized Resource Allocation, " International Economic Review,
Vol. 11, No. 2, June, 1970, pp. 318-327.
Castle, E. N. , "The Market Mechanism, Externalities, and Land
Economics, " Journal of Farm Economics, Vol. 47, August,
1965, pp. 542-556.
Cheung, Steven N. S. , "The Fable of the Bees: An Economic Investiga-
tion, " The Journal of Law and Economics, Vol. XVI, April, 1973,
pp. 11-34.
6.20
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Chipman, J. S. , "External Economies of Scale and Competitive Equi-
librium, " Quarterly Journal of Economics, Vol. 84, No. 3,
August, 1970, pp. 347-385.
Cho, Jae H. , "Externalities and Land Economics, " Land Economics,
Vol. 47, No. 1, February, 1971, pp. 65-72.
Connolly, M. , "Public Goods, Externalities, and International Rela-
tions, " J^uj^nal_oj|_^pjJJ]^^3.JE^n^mj^, Vol. 78, No. 2, March-
April, 1970, pp. 279-290.
Copes, P. , "Factor Rents, Sole Ownership, and the Optimum Level of
Fisheries Exploitation, " Manchester School of Economic and
Social Studies, Vol. 40, No. 2, June, 1972, pp. 145-163.
Diamond, P. A. , "Consumption Externalities and Imperfect Corrective
Pricing," Bell Journal of Economics and Management Science,
Vol. 4, No. 2, Autumn, 1973, pp. 526-538.
Dusansky, R. , and P. J. Kalman, "Externalities, Welfare, and the
Feasibility of Corrective Taxes, " Journal of Political Economy,
Vol. 80, No. 5, September-October, 1972, pp. 1045-1051.
Evans, A. W. , "Private Good, Externality, Public Good, " Scottish
Journal of Political Economy, Vol. 17, No. 1, February, 1970,
pp. 79-89.
Federenko, N. , and K. Gofman, "Problems of Optimization in the
Planning and Control of the Environment, " Problems of Eco-
nomics, Vol. 15, No. 12, April, 1973, pp. 37-51.
Forsund, F. R. , "Allocation in. Space and Environmental Pollution,"
Swedish Journal of Economics, Vol. 74, No. 1, March, 1972,
pp. 19-34.
Goetz, C. J. , and J. M. Buchanan, "External Diseconomies in Com-
petitive Supply: Reply, " American Economic Review, Vol. 63,
No. 4, September, 1973, pp. 745-748.
Gould, J. R. , "Externalities, Factor Proportions, and the Level of
Exploitation of Free Access Resources, " Economica, N.S. ,
Vol. 39, No. 156, November, 1972, pp. 383-402.
6.21
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Gould, J. R. , "Extinction of a Fishery by Commercial Exploitation:
A Note, " Journal of Political Economy, Vol. 80, No. 5,
September-October, 1972, pp. 1031-1036.
Gould, J. R. , "Meade on External Economies: Should the Benefici-
aries be Taxed?" The Journal of Law and Economics, Vol. XVI,
April, 1973, pp. 53-66.
Gramm, W. P. , "A Theoretical Note on the Capacity of the Market
System to Abate Pollution, " Land Economics, Vol. 45, No. 3,
August, 1969, pp. 365-368.
Gramm, W. P., "A Theoretical Note on the Capacity of the Market
System to Abate Pollution: Rejoinder, " Land Economics,
Vol. 48, No. 3, August, 1972, pp. 306-308.
Hay, G. A., and J. J. McGowan, "External Economies and Competi-
tive Equilibrium, " Canadian Journal of Economics, Vol. 5,
No. 4, November, 1972, pp. 562-564.
Holtermann, S. E. , "Externalities and Public Goods, " Economica,
N.S., Vol. 39, No. 153, February, 1972, pp. 78-87.
Homma, M. , "A Dynamic Pigovian Policy Under Production External-
ities, " Economic Studies Quarterly, Vol. 24, No. 2, August,
1973, pp. 26-30.
James, E. , "Joint Products, Collective Goods, and External Effects:
Comment, " Journal of Political Economy. Vol. 79, No. 5,
September-October, 1971, pp. 1129-1135.
Johnson, David B. , "Meade, Bees, and Externalities, " The Journal of
Law and Economics. Vol. XVI, April, 1973, pp. 35-52.
Kafoglis, M. Z. , "Highway Policy and External Economies, " National
Tax Journal. Vol. 16, March, 1963, pp. 68-80.
Kahn, A. E. , "The Tyranny of Small Decisions: Market Failures,
Imperfections, and the Limits of Economics, " Kyklos, Vol. 19,
fasc. 1, 1966, pp. 23-46.
6.22
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Kamerschen, D. R. , "Institutional External Economies, " Rivista
Internationale dc Scienze Economiche e Commerciali. Vol. 15,
No. 9, September, 1968, pp. 849-870.
Kamien, M. I., N. L. Schwartz, and D. J. Roberts, "Exclusion,
Externalities and Public Goods, " Journal of Public Economics,
Vol. 2, No. 3, July, 1973, pp. 217-Z30.
Keeler, E. , M. Spence, and R. Zeckhauser, "The Optimal Control of
Pollution, " Journal of Economic Theory, Vol. 4, No. 1,
February, 1972, pp. 19-34.
Krupp, S. , "Analytic Economics and the Logic of External Effects, "
American Economic Association, Papers and Proceedings,
Vol. 53, May, 1963, pp. 220-226.
Ledyard, J. O. , "The Relation of Optima and Market Equilibria with
Externalities, " Journal of Economic Theory, Vol. 3, No. 1,
March, 1971, pp. 54-65.
Long, M. F., "Collective-Consumption Services of Individual-Con-
sumption Goods: Comment, " Quarterly Journal of Economics,
Vol. 81, May, 1967, pp. 351-352.
Margolis, Julius, "Secondary Benefits, External Economies, and the
Justification of Public Investment, " Review of Economics and
Statistics, Vol. 41, August, 1959, pp. 232-241.
Mazziotti, Donald F. , "Social Cost Internalization and Environmental
Planning: 'Steady State1 and 'Optimal1 Economic Assumptions, "
Working Paper Series 12, Iowa City, Iowa, The Institute of Urban
and Regional Research, The University of Iowa, August, 1973.
McKee, D. L. , and G. Smith, "Environmental Diseconomies in Sub-
urban Expansion, " American Journal of Economics and Statistics,
Vol. 31, No. 2, April, 1972, pp. 181-188.
Meade, J. E. , "External Economies and Diseconomies in a Competi-
tive Situation, " Economic Journal, Vol. 62, March, 1952,
pp. 54-67.
Meyer, R. A. , "Externalities as Commodities, " American Economic
Review, Vol. 61, No. 4, September, 1971, pp. 736-740.
6.23
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Millward, R. , "Exclusion Costs, External Economies, and Market
Failure, " Oxford Economic Papers, Vol. 22, No. 1, March,
1970, pp. 24-38.
Mishan, E. J. , "Joint Products, Collective Goods, and External Effects:
Reply. " Journal of Political Economy, Vol. 79, No. 5, September-
October, 1971, pp. 1141-1150.
Mishan, E. J. , "The Postwar Literature on Externalities: An Interpre-
tative Essay, " Journal of Economic Literature, Vol. 9, No. 1,
March, 1971, pp. 1-28.
Mishan, E. J. , "Reflections on Recent Developments in the Concept of
External Effects, " Canadian Journal of Economics and Political
Science, Vol. 31, February, 1965, pp. 3-34.
Mishan, E. J., "The Relationship Between Joint Products, Collective
Goods, and External Effects, " Journal of Political Economy,
Vol. 77, No. 3, May-June, 1969, pp. 329-348.
Mishan, E. J. , "Welfare Criteria for External Effects, " American
Economic Review, Vol. 51, September, 1961, pp. 594-613.
Neutze, G. M. , "The External Diseconomies of Growth in Traffic, "
Economic Record, Vol. 39, September, 1963, pp. 332-345.
Ng, Yew-Kwang, "Recent Developments in the Theory of Externality
and the Pigovian Solution," Economic Record, Vol. 47, No. 118,
June, 1971, pp. 169-185.
Nichols, A. , "External Diseconomies in Competitive Supply: Comment, "
American Economic Review, Vol. 63, No. 4, September, 1973,
pp. 741-742.
Noll, R. G. , and J. Trijonis, "Mass Balance, General Equilibrium,
and Environmental Externalities, " American Economic Review,
Vol. 61, No. 4, September, 1971, pp. 730-735.
Olson, M. , Jr. , and R. Zeckhauser, "The Efficient Production of
External Economies, " American Economic Review, Vol. 60,
No. 3, June, 1970, pp. 512-517.
6.24
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Peltzman, S. , and T. N. Tideman, "Local Versus National Pollution
Control: Note, " American Economic Review, Vol. 62, No. 5,
December, 197Z, pp. 959-963.
Plessas, D. J., "Airplane Noise: Some Analytic and Policy Perspec-
tives, " Land_Ecanormc_s^, Vol. 49, No. 1, February, 1973,
pp. 14-21.
Randall, A., "Market Solutions to Externality Problems: Theory and
Practice," American Journal of Agricultural Economics. Vol. 54,
No. 2, May, 1972, pp. 175-183.
Reiter, S. , and G. R. Sherman, "Allocating Indivisible Resovtrces
Affording External Economies or Diseconomies, " International
Economic Review, Vol. 3, January, 1962, pp. 108-135.
Rosenthal, R. W. , "Taxation vs. Prohibition of an External Disecon-
omy by Direct Vote: A Game Theoretic Approach, " International
Economic Review, Vol. 14, No. 2, June, 1973, pp. 414-420.
Russell, C. S. , "Application of Microeconomic Models to Regional
Environmental Quality Management, " American Economic Review,
Vol. 63, No. 2, May, 1973, pp. 236-243.
Schall, Lawrence D. , "A Note on Externalities and Property Valuation, "
Journal of Regional Science, Vol. 11, No. 1, April, 1971,
pp. 101-105.
Scitovsky, T. , "External Diseconomies in the Modern Economy, "
Western Economic Journal, Vol. 4, No. 3, 1966, pp. 197-202.
Scitovsky, Tibor, "Two Concepts of External Economies, " Journal of
Political Economy, Vol. 62, April, 1954, pp. 143-151.
Shepherd, A. R. , "External Diseconomies in Competitive Supply: Com-
ment, " American Economic Review, Vol. 63, No. 4, September,
1973, pp. 743-744.
Sherman, R. , andT. D. Willett, "Regional Development, Externalities,
and Tax-Subsidy Combin.ttions, " National Tax Journal, Vol. 22,
No. 2, June, 1969, pp. 291-298.
6.25
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Shubik, M. , "Pecuniary Externalities: A Game Theoretic Analysis, "
American Economic Review, Vol. 61, No. 4, September, 1971,
pp. 713-724.
Shupp, F. R. , "Externalities, Shadow Prices, and Benefit-Cost Cal-
culations, " Quarterly Review of Economics and Business.
Vol. 12, No. 4, Winter, 1972, pp. 91-94.
Singer, N. M. , "Joint Products, Collective Goods, and External
Effects: Comment, " Journal of Political Economy, Vol. 79,
No. 5, September-October, 1971, pp. 1136-1137.
Stephens, J. K. , "A Theoretical Note on the Capacity of the Market
System to Abate Pollution: A Reply, " Land Economics. Vol. 48,
No. 3, August, 1972, pp. 304-305.
Tisdell, C. , "On the Theory of Externalities, " Economic Record.
Vol. 46, No. 1'3, March, 1970, pp. 14-25.
Vincent, P. E. , "Reciprocal Externalities and Optimal Input and Output
Levels, " American Economic Review, Vol. 59, No. 5, December,
1969, pp. 976-984.
Walsh, O. , "On Internalizing Externalities, " Economic Record,
Vol. 48, No. 122, June, 1972, pp. 254-259.
Wan, H. Y. , "A Note on Trading Gains and Externalities, " Journal of
International Economics, Vol. 2, No. 2, May, 1972, pp. 173-180.
Weisbrod; B. A. , "Collective-Consumption Services of Individual-
Consumption Goods, " Quarterly Journal of Economics, Vol. 78,
August, 1964, pp. 471-477.
Wheaton, W. C. , "On the Possibility of a Market for Externalities, "
Journal of Political Economy. Vol. 80, No. 5, September-
October, 1972, pp. 1039-1044.
Wilkinson, R. K. , "House Prices and the Measurement of Externalities, "
Economic Journal. Vol. 83, No. 329, March, 1973, pp. 72-86.
Worcester, D. A., "A Note on 'The Postwar Literature on Externalities-
An Interpretative Essay, '" Journal of Economic Literature.
Vol. 10, No. 1, March, 1972, pp. 57-59. '
6.26
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Worcester, D. A. , Jr. , "Pecuniary and Technological Externality,
Factor Rents, and SociaJ Cost, " American Economic Review,
Vol. 59, No. 5, December, 1969, pp. 257-Z74.
6. 3. 1. 3 Public Goods
Bailey, M. J. , "Analytic Framework for Measuring Social Costs [With
Discussion by L. Hurwicz], " Journal of Farm Economics,
Vol. 44, May, 1962, pp. 564-579.
Bailey, M. J. , "Measuring Social Costs: A Reply, " Journal of Farm
Economics, Vol. 45, February, 1963, pp. 220-222.
Barzel, Y. , "Two Propositions on the Optimum Level of Producing
Collective Goods, " Public Choice. Vol. 6, Spring, 1969, pp. 31-
37.
Bergstrom, T. C. , and R. P. Goodman, "Private Demands for Public
Goods, " American Economic Review, Vol. 63, No. 3, June, 1973,
pp. 280-296.
Bish, R. L, and P. D. O'Donoghue, "A Neglected Issue in Public-
Goods Theory: The Monopsony Problem, " Journal of Political
Economy, Vol. 78, No. 6, November-December, 1970,
pp. 1367-1371.
Bish, R. L. , and P. D. O'Donoghue, "Public Goods, Increasing Cost,
and Monopsony: Reply, " Journal of Political Economy, Vol. 81,
No. 1, January-February, 1973, pp. 231-236.
Bohm, P. , "An Approach to the Problem of Estimating Demand for
Public Goods, " Swedish Journal of Economics, Vol. 73, No. 1,
March, 1971, pp. 55-66.
Bradford, D. F., "Benefit-Cost Analysis and Demand Curves for Pub-
lic Goods, " Kvjdp^, Vol. 23, No. 4, 1970, pp. 775-791.
Brennan, G. , "The Optimal Provision of Public Goods: A Comment, "
Journal of Political Economy, Vol. 77, No. 2, March/April,
1969, pp. 237-241.
Buchanan, James, "Cooperation and Conflict in Public-Goods Inter-
action, " W^£tejjiJDcjmojiTic_JV)ujij].^, Vol. 5, March, 1967,
pp. 109-121.
6.27
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Buchanan, J. M. , The Demand and Supply of Public Goods, Chicago,
Illinois, Rand-McNally, 1968.
Buchanan, J. M. , and M. Z. Kafoglis, "A Note on Public Goods Supply, "
American Economic Review, Vol. 53, June, 1963, pp. 403-414.
Buchanan, J. M. , "Who Should Pay for Common-Access Facilities?"
Public Finance. Vol. 27, No. 1, March, 1972, pp. 1-8.
Campa, G. , "On the Pure Theory of Public Goods, " Public Finance,
Vol. 22, No. 4, 1967, pp. 401-416,
Clarke, E. H. , "Multipart Pricing of Public Goods, " Public Choice,
Vol. 11, Fall, 1971, pp. 17-34.
Colm, G. , "Comments on Samuelson's Theory of Public Finance, "
Review of Economics and Statistics, Vol. 38, November, 1956,
pp. 408-412.
Demsetz, Harold, "The Private Production of Public Goods," The
Journal of Law and Economics, Vol. XIII, October, 1970,
pp. 293-307.
Dreze, J. H., and D. De La Vallee Poussin, "A Tatonnement Process
for Public Goods, " Review of Economic .SLudie_s_J Vol. 38, No. 114,
April, 1971, pp. 133-150.
Ekelund, R. , and J. Hulett, "Joint Supply, the Taussig-Pigou Contro-
versy, and the Competitive Supply of Public Goods, " Journal of
Law and Economic^, Vol. 16, October, 1973, pp. 369-387.
Ellickson, B. , "A Generalization of the Pure Theory of Public Goods, "
American Economic Review, Vol. 63, No. 3, June, 1973,
pp. 417-432.
Escarraz, D. R. , "Wicksell and Lindahl: Theories of Public Expendi-
ture and Tax Justice Reconsidered, " National Tax Journal,
Vol. 20, June, 1967, pp. 137-148.
6.28
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Ganguly, S. K. , "The Perfectly Competitive Production of Collective
Goods: Comment, " Review of Economics and Statistics. Vol. 51,
No. 4, November, 1969, pp. 478-479.
Head, J. G. , "Public Goods and Public Policy," Public Finance.
Vol. 17, No. 3, 1962, pp. 197-219.
Head, J. G. , "Public Goods and Separation of Branches, " Public
Finance, Vol. 25, No. 4, 1970, pp. 546-555.
Johansen, L. , "Some Notes on the Lindahl Theory of Determination of
Public Expenditures, " International Economic Review, Vol. 4,
September, 1963, pp. 346-358.
Kaizuka, K. , "A Note on the Pure Theory of Public Expenditure, "
Journal of Economic Behavior, Vol. 1, April, 1961, pp. 73-75.
Kaizuka, K. , "Public Goods and Decentalization of Production, " Review
of Economics and Statistics, Vol. 47, February, 1965, pp. 118-
120.
Kamien, M. I. , and N. L. Schwartz, "Exclusion Costs and the Pro-
vision of Public Goods, " Pu^lic_Choice, Vol. 12, Spring, 1972,
pp. 43-55.
Kamien, M. I. , and N. L. Schwartz, "Revelation of Preference for a
Public Good with Imperfect Exclusion, " Public Choice, Vol. 9,
Fall, 1970, pp. 19-30.
Litvak, J. M., and W. E. Oates, "Group Size and the Output of Public
Goods: Theory and an Application to State-Local Finance in the
United States. " Public Finance. Vol. 25, No. 1, 1970, pp. 42-62.
Malinvaud, E. , "A Planning Approach to the Public Good Problem, "
Swedish Economic Journal, Vol. 73, No. 1, March, 1971,
pp. 96-112.
Margolis, J. , "A Comment on the Pure Theory of Public Expenditure, "
Review of Economics and Statistics, Vol. 37, November, 1955,
pp. 347-349.
McGuire, T. , "A Note on Lindahl's Voluntary Exchange Theory, "
Public Finance, Vol. 28, No. 1, 1973, pp. 94-97.
6.29
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Meyer, B. A. , "Private Costs of Using Public Goods, " Southern Eco-
nomic Journal. Vol. 37, No. 4, April, 1971, pp. 479-488.
Milleron, J. , "Theory of Value with Public Goods: A Survey Article, "
Journal of Economic Theory, Vol. 5, No. 3, December, 1972,
pp. 419-477.
*
Mohring, H. , and A. Maslove, "The Optimal Provision of Public Goods:
Yet Another Comment, " Journal of Political Economy, Vol. 81,
No. 3, May-June, 1973, pp. 7*78-785.
Muench, T. J. , "The Core and the Lindahl Equilibrium of an Economy
with a Public Good: An Example, " Journal of Economic Theory,
Vol. 4, No. 2, April, 197Z, pp. 241-255.
Musgrave, R. A. , "Provision for Social Goods in the Market System, "
Public Finance, Vol. 26, No. 2, 1971, pp. 304-320.
Ng, Yew-Kwang, "Definitions and Welfare Conditions of Public Goods, "
Scottish Journal of Political Economy, Vol. 18, No. 2, June,
1971, pp. 199-202.
Ng, Yew-Kwang, "Definitions and Welfare Conditions of Public Goods:
A Rejoinder, " Scottish Journal of Political Economy, Vol. 18,
No. 3, November, 1971, pp. 347-349.
Oakland, William H. , "Public Goods, Perfect Competition and Under-
production, " Journal of Political Economy, Vol. 82, No. 5,
September/October, 1974, pp. 927-939.
Orlowski, M. , "Provision for Social Goods in the Market System --
Comments on the Paper by Professor Musgrave, " Public Finance,
Vol. 26, No. 2, 1971, pp. 321-328.
Owen, B. M., "The Perfectly Competitive Production of Collective
Goods: Comment, " Review of Economics and Statistics, Vol. 51,
No. 4, November, 1969, pp. 475-476.
6. 30
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Roberts, D. J. , "Pareto, Public Goods, and Politics: A Comment,"
Canadian Journal of Economics, Vol. 3, No. 4, November, 1970,
pp. 615-616.
Rodgers, J. D. , "The Perfectly Competitive Production of Collective
Goods: Comment, " Review of Economics and Statistics. Vol. 51,
No. 4, November, 1969, pp. 476-477.
Roskamp, K, W. , "Optimal Supply of a Public Good: A Comment, "
Review of Economics and Statistics, Vol. 52, No. 3, Axigust,
1970, pp. 337-339.
Samuelson, P. A. , "Contrast Between Welfare Conditions for Joint
Supply and for Public Goods, " Review of Economics and Statistics,
Vol. 51, No. 1, February, 1969, pp. 26-jO.
Shibata, H. , "A Bargaining Model of the Pure Theory of Public Expend-
iture, " Jj2!irj]jl_ojf_JPj^ljj.i_^^ Vol. 79, No. 1, January-
February, 1971, pp. 1-29.
Shibata, H. , "Public Goods, Increasing Cost, and Monopsony: Com-
ment, " Journal of Political Economy, Vol. 81, No. 1, January-
February, 1973, pp. 223-230.
Shoup, C. S. , "Public Goods and Joint Production, " Ri vista Inter-
nazionalc di Science Economiche e Commerciali, Vol. 12,
March, 1965, pp. 254-264.
Stiglitz, J. E. , and P. Dasgupta, "Differential Taxation, Public Goods,
and Economic Efficiency, " Review of Economic Studies, Vol. 38,
No. 114, April, 1971, pp. 151-174.
Strotz, R. H. , "Two Propositions Related to Public Goods, " Review of
Economics and Statistics, Vol. 40, November, 1958, pp. 329-
331.
Tanzi, V. , "Exclusion, Pure Public Goods, and Pareto Optimality, "
Public Finance, Vol. 27, No. 1, March, 1972, pp. 75-78.
Thompson, Earl A., "The Perfectly Competitive Production of Collec-
tive Goods, " Review of Economics and Statistics, Vol. 50, No. 1,
February, 1968, pp. l-]2.
6.31
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Thompson, E. A. , "The Perfectly Competitive Production of Collective
Goods: Reply. " Review of Economics and Statistics, Vol. 51,
No. 4, November, 1969, pp. 479-482.
Tollison, R. D. , "Consumption Sharing and Non-Exclusion Rules, "
Economica. N. S. , Vol. 39, No. 155, August, 1972, pp. 276-291.
Tullock, Gordon, "Public Decisions as Public Goods, " Journal of Polit-
ical Economy, Vol. 79, No. 4, July-August, 1971, pp. 913-918.
West, E. G. , "The Bilateral Monopoly Theory of Public Goods: A
Critique, " Journal of Political Economy. Vol. 81, No. 5,
September-October, 1973, pp. 1226-1235.
Wilde, J. A., "Social Goods, Benefit Taxation, and Income Elasticity, "
Public Finance. Vol. 27, No. 1, March, 1972, pp. 79-81.
Williams, Alan, "The Optimal Provision of Public Goods in a System
of Local Government, " Journal of Political Economy, Vol. 74,
February, 1966, pp. 18-33.
Winch, D. M. , "Pareto, Public Goods, and Politics, " Canadian Journal
of Economics, Vol. 2, No. 4, November, 1969, pp. 492-508.
Winch, D. M. , "Pareto, Public Goods, and Politics: A Reply, "
Canadian Journal of Economics, Vol. 3, No. 4, November,
1970, pp. 616-617.
6.3.1.4 Impure Public Goods
Barzel, Y. , "The Market for a SemipubKc Good: The Case of the
American Economic Review, " American Economic Review,
Vol. 61, No. 4, September, 1971, pp. 665-674.
Borukhov, E. , "Optimal Service Areas for Provision and Financing
of Local Public Goods. " Public Finance. Vol. 27, No. 23, 1972,
pp. 267-281.
Brainard, W. C. , and F. T. Dolbcar, Jr., "The Possibility of Over-
supply of Local 'Public Goods:1 A Critical Note [With Rejoinder
by A. Williams], " Journal of Political Economy, Vol. 75,
February, 1967, pp. 86-92.
6.32
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Brown, K. M. , "Welfare Implications of Congestion in Public Goods, "
Review of Social Economy. Vol. 31, No. 1, April, 1973, pp. 89-
92.
Buchanan, J. M. , "An Economic Theory of Clubs, " Economica. N.S.
Vol. 32, February, 1965, pp. 1-14.
Cebula, R. J. , and P. K. Gatons, "A Note on Public, Private, and
Ambiguous Goods, " Public Finance, Vol. 27, No. 1, March,
1972, pp. 69-72.
Cicchetti, C. J., and V. K. Smith, "Jointly Supplied Mixed Goods:
Reply," Quarterly Review of Economics and Business, Vol. 12,
No. 4, Winter, 1972, pp. 96-97.
Cicchetti, C. J., and V. K. Smith, "A Note on Jointly Supplied Mixed
Goods, " Quarterly Review of Economics and Business, Vol. 10,
No. 3, Autumn, 1970, pp. 90-94,
Davis, O. A., and A. B. Whinston, "On the Distinction Between Public
and Private Goods, " American Economic Association, Papers
and Proceedings, Vol. 57, May, 1967, pp. 360-373.
Ginsburg, Alan L. , "Public Provision, Jointness, and Efficiency, "
Public Finance, Vol. 25, No. 4, 1970, pp. 465-484.
Haveman, R. H. , "Cominon Property, Congestion, and Environmental
Pollution, " Quarterly Journal nf Economics, Vol. 87, No. 2,
May, 1973, pp. 278-287.
Head, J. G., and C. S. Shoup, "Public Goods, Private Goods, and
Ambiguous Goods, " Economic Journal, September, 1969.
Hulett, J. R. , "Jointly Supplied Mixed Goods: Comment, " Quarterly
Review of Economics and Business, Vol. 12, No. 4, Winter,
1972, pp. 94-96.
McGuire, M. , "Private Good Clubs and Public Good Clubs: Economic
Models of Group Formation, " Swedish Journal of Economics,
Vol. 74, No. 1, March, 1972, pp. 84-99.
Milliman, J. W, , "Commonality, The Price System, and Use of Water
Supplies." Southern Economic Journal, Vol. 22, April, 1956,
pp. 426-437.
6. 33
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Morrison, C. C. , "Joint Production and Pareto Optimality, " Southern
Economic Journal, Vol. 37, No. 2, October, 1970, pp. 221-222.
Ng, Yew-Kwang, "The Economic Theory of Clubs: Pareto Optimality
Conditions, " Economica, N.S., Vol. 40, No. 159, August, 1973,
pp. 291-298.
Oakland, W. H. , "Joint Goods, " Economica. Vol. 36, No. 143, August,
1969, pp. 253-268.
Pauly, M. V. , "Clubs, Commonality, and the Core: An Integration of
Game Theory and the Theory of Public Goods, " Economica, New
Series, Vol. 34, August, 1967, pp. 314-324.
Pauly, M. V., "Optimality, 'Public' Goods, and Local Governments:
- A General Theoretical Analysis, " Journal of Political Economy,
Vol. 78, No. 3, May-June, 1970, pp. 572-585.
Prest, A. R. , and R. Turvey, "Cost-Benefit Analysis: A Survey, "
Economic Journal, Vol. 75, December, 1965, pp. 683-735.
Winch, D. M.. , "The Pure Theory of Non-Pure Goods, " Canadian
Journal of Economics. Vol. 6, No. 2, May, 1973, pp. 149-163.
6.3.1.5 Theory of Second Best
Athanasiou, L.. , "Some Notes on the Theory of Second Best, " Oxford
Economic Papers, Vol. 18, March, 1966, pp. 83-87.
Bohm, P. , "On the Theory of 'Second Best, '" Review of Economic
Studies. Vol. 34, July, 1967, pp. 301-314.
Davis, O. A. , and A. B. Whinston, "Piecemeal Policy in the Theory
of the Second Best, " Review of Economic Studios, Vol. 34, July,
1967, pp. 323-331.
Davis, O. A. , and A. B. Whinston, "Welfare Economics and the Theory
of Second Best, " Review of Economic Studies, Vol. 32, January,
1965, pp. 1-14.
Heckman, J. , and R. Nelson, "A Note for Second Best Conditions for
Public Goods. " Public Finance, Vol. 27, No. 1, March, 1972,
pp. 73-74.
6.34
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Kolm, S. , "Footnotes to Marcel Boitcux's Value-Constrained Second
Best, " Journal of Economic Theory. Vol. 3, No. 3, September,
1971, pp. 341-344.
Lipsey, R. G. , and K. Lancaster, "The General Theory of Second
Best, " Review of Economic Studies. Vol. 24, No. 1, 1956,
pp. 11-32.
McManus, M. , "Comments on the General Theory of Second Best
[Followed by K. Lancaster and R. G. Lipsey's Rejoinder], "
Review of Economic Studies, Vol. 26, June, 1959, pp. 209-226.
McManus, M, , "Private and Social Costs in the Theory of the Second
Best, " Review of Economic Studies. Vol. 34, July, 1967,
pp. 317-321.
Mishan, E. J. , "Second Thoughts on Second Best, " Oxford Economic
Papers, N.S., Vol. 14, October, 1962, pp. 205-217.
Morrison, C. C. , "The Nature of Second Best, " Southern Economic
Journal, Vol. 32, July, Lj65, pp. 49-52.
Ng, Yew-Kwang, "Pareto Conditions, Behavioural Rules, and the
Theory of Second Best," Australian Economic Pap_ers, Vol. 11,
No. 18, June, 1972, pp. 124-125.
Rees, R. , "Second-Best Rules for Public Enterprise Pricing, " Eco-
nomic a, N.S., Vol. 35, No. 139, August, 1968, pp. 260-273.
Santoni, G. , and A. Church, "A Comment on the General Theorem of
the Second Best, " Review of Economic Stxidies, Vol. 39, No. 4,
October, 1972, pp. 527-530.
Sau, R. K. , "Monopoly, General Equilibrium, and the Theory of
Second Best, " Australian Economic Papers, Vol. 10, No. 16,
June, 1971, pp. 40-44.
Toyama, K. , "A Further Study of the Second Best Theory, " Economic
Studies Quarterly, Vol. 23, No. 2, August, 1972, pp. 24-38.
6.35
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6.3.1.6 Decreasing Cost
Heal, G. M. , "Planning, Prices, and Increasing Returns, " Review of
Economic Studies, Vol. 38, No. 115, July, 1971, pp. 281-294.
Rader, T. , "Resource Allocation with Increasing Returns to Scale, "
American Economic Review, Vol. 60, No. 5, December, 1970,
pp. 192-195.
Tisdell, C. , "Efficiency and Decreasing Cost Industries, " Australian
Economic Papers, Vol. 9, No. 15, December, 1970, pp. 256-
272.
6.3.1.7 Information and Transaction Costs
Alchian, A. A., and II. Demsetz, "Production, Information Costs, and
Economic Organization, " American Economic Review, Vol. 62,
No. 5, December, 1972, pp. 777-79?.
Halm, F. H. , "Equilibrium with Transaction Costs, " Econometrica,
Vol. 39, No. 3, May, 1971, pp. 417-439.
Krier, J. E. , and W. D. Montgomery, "Resource Allocation, Informa-
tion Cost, and the Form of Government Intervention, " Natural
Resources Journal, Vol. 13, No. 1, January, 1973, pp. 89-105.
Porter, W. R. , "The Value of Information in Making Public Decisions, '
Intel-mountain Economic Review, Vol. 1, No. 1, Fall, 1970,
pp. 26-40.
6. 3. 1. 8 Uncertainty
Albin, P. S. , "Uncertainty, Information Exchange, and the Theory of
Indicative Planning, " Economic Journal, Vol. 81, No. 321,
March, 1971, pp. 61-90.
Arrow, K. J. , and R. C. Lind, "Uncertainty and the Evaluation of
Public Investment Decisions, " American Economic Review,
Vol. 60, No. 3, June, 1970, pp. 364-378.
Arrow, K. J. , and R. C. Lind, "Uncertainty and the Evaluation of
Public Investment Decisions: Reply, " American Economic
Review. Vol. 62, No. 1, March, 1972, pp. 171-172.
6.36
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McKean, R. N. , and J. H. Moore, "Uncertainty and the Evaluation of
Public Investment Decisions: Comment, " American Econoniic
Review, Vol. 62, No. 1, March, 1972, pp. 165-167.
Mishan, E. J. , "Uncertainty and the Evaluation of Public Investment
Decisions: Comment, " American Economic Review, Vol. 62,
No. 1, March, 1972, pp. 161-164.
Nichols, A. , "Uncertainty and the Evaluation of Public Investment
Decisions: Comment, " American Economic Review, Vol. 62,
No. 1, March, 1972, pp. 168-169.
Wellington, D. , "Uncertainty and the Evaluation of Public Investment
Decisions: Comment, " American Economic Review, Vol. 62,
No. 1, March, 1972, p. 170.
6.3.1.9 Equity and Efficiency
Azzi, C. F. , and J. C. Cox, "Equity and Efficiency in Evaluation of
Public Programs, " Quarterly Journal of Economics, Vol. 87,
No. 3, August, 1973, pp. 495-502.
Bradford, D. F., "Constraints on Public Action and Rules for Social
Decision, " American Economic Review, Vol. 60, No. 4,
September, 1970, pp. 642-654.
Diamond, P. A. , and J. A. Mirrlees, "Optimal Taxation and Public
Production: I - Production Efficiency, " American Economic
Review, Vol. 61, No. 1, March, 1971, pp. 8-27.
Diamond, P. A. , and J. A. Mirrlees, "Optimal Taxation and Public
Production: II - Tax Rules, " American Economic Review,
Vol. 61, No. 3, June, 1971, pp. 261-278.
Feldstein, M. S. , "Distributional Equity and the Optimal Structure of
Public Prices, " American Economic. Review, Vol. 62, No. 1,
March, 1972, pp. 32-36.
Feldstein, M. S. , "Equity and Efficiency in Public Pricing, " Quarterly
Journal of Economics, Vol. 86, No. 2, May, 1972, pp. 175-187.
Hansen, W. L. , and B. A. Weisbrod, "Distributional Effects of Public
Expenditure Programs, " Public Finance, Vol. 27, No. 4, 1972,
pp. 414-420.
6. 37
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Hansen, W. L. , and B. A. Weisbrod, "Who Pays for a Public Expendi-
ture Program?" National Tax Journal, Vol. 24, No. 4, December,
1971, pp. 515-517.
Head, J. G. , "Equity and Efficiency in Public Goods Supply, " Public
Finance, Vol. 25, No. 1, 1970, pp. 24-41.
Hochman, H. M., "Professor Head on Equity and Efficiency: Comment
and Addendum. " Public Finance, Vol. 25, No. 4, 1970, pp. 536-
545.
Maital, S. , "Public Goods and Income Distribution: Some Further
Results, " Economctrica, Vol. 41, No. 3, May, 1973, pp. 56l-
568.
Mathur, V. K. , "The Integration of Equity and Efficiency Criteria in
Public Project Selection: A Comment, " Economic Journal.
Vol. 81, No. 324, December, 1971, pp. 929-931.
McGuire, M. C. , and H. Aaron, "Efficiency and Equity in the Optimal
Supply of a Public Good, " Review of Economics and Statistics,
Vol. 51, No. 1, February, 1969, pp. 31-40.
McGuire, M. C. , and H. A. Garn, "The Integration of Equity and
Efficiency Criteria in Public Project Selection, " Economic
Journal, Vol. 79, No. 2, December, 1969, pp. 307-318.
McGuire, M. C. , and H. A. Garn, "The Integration of Equity and
Efficiency Criteria in Public Project Selection: A Reply, "
Economic Journal, Vol. 81, No. 324, December, 1971,
pp. 931-933.
McLure, C. E. , "The Theory of Expenditures Incidence, " Finanz -
Archiv, Vol. 30, No. 3, 1972, pp. 432-453.
Mumphrey, A. J. , and J. Wolpert, "Equity Considerations and Con-
cessions in the Siting of Public Facilities, " Economic Geography,
Vol. 49, No. 2, April, 1973, pp. 109-121.
Pauly, M. V., and T. D. Willett, "Two Concepts of Equity and Their
Implications for Public Policy, " Social Science Quarterly,
Vol. 53, No. 1, June, 1972, pp. 8-19.
6. 38
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6.3.2 Property R ights
d'Arge, R. , "Coase Theorem Symposium, " Natural Resources Journal,
Vol. 13, No. 4, October, 1973, pp. 557-560.
Berg, S. V. , "Copyright, Conflict, and a Theory of Property Rights, "
Journal of Economic Issues, Vol. 5, No. 2, June, 1971,
pp. 71-79.
Borcherding, T. E. , "Liability in Law and Economics: Note,"
American Economic Review, Vol. 60, No. 5, December, 1970,
pp. 946-948.
Bottomley, Anthony, "The Effect of the Common Ownership of Land
Upon Resource Allocation in Tripolitania, '' Land Economics,
Vol. 39, February, 1963, pp. 91-95.
Bush, Winston C. , and Lawrence S. Mayer, "Some Implications of
Anarchy for the Distribution of Property, " Journal of Economic
Theory, Vol. 8, No. 4, August, 1974, pp. 401-412.
De Alessi, L. , "Some Implications of Property Rights Structures for
Investment Choices Within the Government, " American Economic.
Review, Vol. 59, No. i, March, 1969.
Dunham, A. , "Promises Respecting the Use of Land, " Journal of Law
and Economics, Vol. 8, October, 1965, pp. 133-165.
Ellerman, D. , "Introduction to Normative Property Theory, " Review
of Radical Political Economics, Vol. 4, No. 2, Summer, 1972,
pp. 49-67.
Freeh, H. E. , III, "Pricing of Pollution: The Coase Theorem in the
Long Run, " Bell Journal of Economics and Management Science,
Vol. 4, No. 1, Spring, 1973, pp. 316-319.
Goldie, L. F. , "Amenities R ights: Parallels to Pollution Taxes, "
Natural Resources Journal,. Vol. 11, No. 2, April, 1971,
pp. 274-280.
6.39
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Havrilcsky, Thomas M. , "Information and Economic Analysis, "
Annals of the American Academy of Political and Social Science,
Vol. 412, March, 1974, pp. 64-79.
Jordahl, H. C. , Jr. , "Conservation and Scenic Easements: An Expe-
rience Resume [In Wisconsin], " Land Economics, Vol. 39,
November, 1963, pp. 343-365.
Kleinsorge, P. L. , "[Toward a Theory of Property Rights] Discussion, "
American. Economic Association, Papers and Proceedings,
Vol. 57, May, 1967, pp. 375-377.
Kneese, A. V. , and K. Maler, "Bribes and Charges in Pollution Con-
trol: An Aspect of the Coase Controversy, " Natural Resources
Journal, Vol. 13, No. 4, October, 1973, pp. 705-716.
Kneese, A. V. , "Economic Responsibility for the By-Products of
Production, " Annals of the American Academy of Political and
Social Science, Vol. 389, May, 1970, pp. 56-62.
Kunreuther, H. , "[Property Rights and Behavior] Discussion, "
American Ecqnomi c Association,__Pa p_e rs and Proceedings,
Vol. 57, May, 1967, pp. 377-379.
Maloney, F. E. , and S. Plager, "Multiple Interests in Riparian Rights,
Subdivision Platting, and Allocation of Riparian Rights, " Journal
of Urban Law, Vol. 46, No. 1, Fall, 1968, pp. 41-66.
McKean, R. N. , "Property Rights Within Government and Devices to
Increase Governmental Efficiency, " Southern Economic Journal,
Vol. 39, No. 2, October, 1972, pp. I?7-186.
Pejovich, S. , "Towards an Economic Theory of the Creation and Spec-
ification of Property Rights, " Review of Social Economy. Vol. 30,
No. 3, September, 1972, pp. 309-325.
Rottenberg, S. , "Liability in Law and Economics, " American Economic
Review. Vol. 55, March, 1965, pp. 107-114.
Samuels, Warren J. , "In Defense of a Positive Approach lo Govern-
ment as an Economic Variable, " The Journal of Law and Eco-
nomics, Vol. XV, October, 1972, pp. 453-459.
6.40
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Samuels, Warren J,, "Interrelations Between Legal and Economic
Processes, " The Journal of Law and Economics, Vol. XIV,
October, 1971, pp. 435-450. ~
Stroup, Richard, and John Baden, "Externality, Property Rights and
the Management of our National Forests, " The Journal of Law
and Economics. Vol. XVI, October, 1973, pp. 303-312.
Tybout, R. A. , "Pricing of Pollution: The Coase Theorem in the Long
Run: Reply, " Bejj_Jou_rnai_gf Economics and Management Science,
Vol. 4, No. 1, Spring, 1973, pp. 320-321.
Wiggins, B. , "Applying the Fairness Doctrine to Environmental Issues:
Friends of the Earth vs. FCC, " Natural Resources Journal,
Vol. 12, No. 1, January, 1972, pp. 108-115.
Wunclerlich, G. , "A Concept of Property, " Agricultural Economics
Research, Vol. 21, No. 1, January, 1969, pp. 1-6.
Wunderlich, Gene, "Property Rights and Information, " Annals of the
American Academy of Political and Social Science, Vol. 412,
March, 1974, pp. 80-96.
6.3.3 Land Use and Land Value Models
Alonso, William, Location and Land Use, Cambridge, Massachusetts;,
Harvard University Press, 1964.
Alonso, William, "A Theory of the Urban Land Market, " Regional
Science Association, Papers and Proceedings, Vol. 6, I960,
pp. 149-157.
Anderson, R. J. , Jr., and T. D. Crocker, "Air Pollution and Prop-
erty Values: A Reply, " Review of Economics and Statistics,
Vol. 54, No. 4, November, 1972, pp. 470-473.
Anderson, R. J. , Jr., and T. D. Crocker, "Air Pollution and Resi-
dential Property Values, " Urban Studies, Vol. 8, No. 3,
October, 1971, pp. 171-180.
Anderson, T. R., "Social and Economic Factors Affecting the Location
of Residential Neighborhoods, " Regional Science Association.
Papers and Proceedings, Vol. 9, 1962, pp. 161-170.
6.41
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Averous, C. P. , and D. B. Lee, Jr. , "Land Allocation and Transpor-
tation Pricing in a Mixed Economy, " Journal^of Regional Science,
Vol. 13, No. 2, August, 1973, pp. 173-185.
Bailey, M. J. , "Effects of Race and of Other Demographic Factors on
the Values of Single-Family Homes, " Land Economics, Vol. 42,
May, 1966, pp. 215-Z20.
Barlev, B. , "Location Effects of Intra-Area Tax Differentials, " Land
Economics. Vol. 49, No. 1, February, 1973, pp. 86-89.
Batty, M., "Recent Developments in Land-Use Modelling: A Review
of British Research. " Urban Studies, Vol. 9, No. 2, June, 1972,
pp. 151-177.
Beckmann, M. J. , "On a Neoclassical Model of Land Use: Reply, "
Swedish Journal of Economics, Vol. 74, No. 3, September,
1972, p. 405.
Beckmann, M. J. , "On the Distribution of Urban Rent and Residential
Density," Journal of Economic Theory, Vol. 1, No. 1, June,
1969, pp. 60-67.
Beckmann, Martin J. , "Spatial Equilibrium in the Housing Market, "
Journal of Urban Economics, Vol. 1, No. 1, January, 1974,
pp. 99-107.
Bradford, D. F. , "An Econometric Simulation of Intra-Metropolitan
Housing Location: Housing, Business, Transportation, and Local
Government: Discussion," American Economic Review, Vol. 62,
No. 2, May, 1972, pp. 99-102.
Brigham, E. F. , "The Determinants of Residential Land Values, "
Land Economics, Vol. 41, November, 1965, pp. 325-334.
Brodsky, H. , "Residential Land and Improvement Values in a Central
City." Land Economics. Vol. 46, No. 3, August, 1970,
pp. 229-247.
Capper, G. C. F. , and J. P. Lewis, "Decay, Development, and Land
Values, " Manchester School of Economics and Social Studies,
Vol. 32, January, 1964, pp. 25-41
6.42
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Casetti, E. , "Equilibrium Land Values and Population Densities in an
Urban Setting, " Economic Geography, Vol. 47, No. 1, January,
1971, pp. 16-20.
Casetti, E. , "Urban Land Value Functions: Equilibrium Versus Opti-
mality, " Economic Geography, Vol. 49, No. 4, October, 1973,
pp. 357-365.
Chinitz, B. , "Contrasts in Agglomeration: New York and Pittsburgh, "
American Economic Association, Papers and Proceedings,
Vol. 51, May, 1961, pp. 279-289.
Clonts, H. A. , Jr. , "Influence of Urbanisation on Land Values at the
Urban Periphery," Land Economics, Vol. 46, No. 4, November,
1970, pp. 489-497.
Crowley, R. W. , "A Case Study of the Effects of an Airport on Land
Values, " Journal of Transport Economics and Policy, Vol. 7,
No. 2, May, 1973, pp. 144-152.
Czamanski, S. , "A Model of Urban Land Allocation, " Growth and
Change,, Vol. 4, No. 1, January, 1973, pp. 43-48.
Engle, R. F. , F. M. Fisher, and J. R. Harris, "An Econometric Sim-
ulation Model of hitra-Metropolitan Housing Location: Housing,
Business, Transportation, and Local Government, " American
Economic Review, Vol. 62, No. 2, May, 1972, pp. 87-97.
Essays in Urban Land Economics, In honor of the Sixty-Fifth Birthday
of Leon Grebler, Los Angeles, California, University of
California, 1966.
Federenko, N. , "Questions Pertaining to Optimization of the Growth
and Location of Production, " Problems of Economics, Vol. 1 1,
No. 9, January, 1969, pp. 14-23.
Fisher, E. M. , "Economic Aspects of Urban Land Use Patterns, "
Journal of Industrial Economics, Vol. 6, June, 1958, pp. 198-
208.
Forward, C. N. , "A Comparison of Waterfront Land Use in Four
Canadian Ports: St. John's, St. John, Halifax, and Victoria,"
Economic Geography, Vol. 45, No. 2, April, 1969, pp. 155-169.
6.43
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Goldberg, M. A. , "An Evaluation of the Interaction Between Urban
Transport and Land Use Systems, " Land Economics, Vol. 48,
No. 4, November, 1972, pp. 338-346.
Goldberg, M. A., "Transportation, Urban Land Values, and Rents:
A Synthesis, " Land Economics, Vol. 46, No. 2, May, 1970,
pp. 153-162.
Gordon, Peter, and William K. MacReynolds, "Optimal Urban Forms, "
Journal of Regional Science, Vol. 14, No. 2, August, 1974,
pp. 217-231.
Gottleib, M. , "Influences on Value in Urban Land Markets, U. S. A. ,
1956-1961, " Journal of Regional Science, Vol. 6, No. 1, 1965,
pp. 1-16.
HarV.wick, Philip G. , and John M. Hartwick, "Allocation in a Multi-
nucleated City, " Quarterly Journal of Economics, Vol. 88,
No. 2, May, 1974, pp. 340-352.
Harvey, R. O. , and W. A. V. Clark, "The Nature and Economics of
Urban Sprawl, " Land Economics, Vol. 41, February, 1965,
pp. 1-9.
Haskell, M. A. , and S. Leshinski, "Fiscal Influences on Residential
Choice: A Study of the New York Region, " Quarterly Review of
Economics and Business, Vol. 9, No. 4, Winter, 1969, pp. 47-
55.
Haugen, R. A. , and A. J. Heins, "A Market Separation Theory of
Rent Differentials in Metropolitan Areas, " Quarterly Journal of
Economics, Vol. 83, No. 4, November, 19&9, pp. 660-672.
Henderson, J. V. , "Optimum City Size: The External Diseconomy
Question, " Journal of Political Economy, Vol. 82, No. 2,
Parti, March-April, 1974, pp. 373-388.
Hendon, William S. , "The Park as a Determinant of Property Values, "
American Journal of Economics and Sociology, Vol. 30, No. 3,
July, 1971, pp. 289-300.
Hendon, W. S, , "Property Values, Schools, and Park-School Combin-
ations, " Lajid_E_corio_mJ.c_s_, Vol. 49, No. 2, May, 1973, pp. 2l6-
218.
6.44
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Hochman, O. , and D. Pines, "Note on Land Use in a Long Narrow
City, " Journal of Economic Theory, Vol. 5, No. 3, December,
1972, pp. 540-541.
Jones, F., "Taxation and Industrial Location, " New Mexico Business,
Vol. 23, No. 6, June, 1970, pp. 1-4.
Knetsch, J. L. , "The Influence of Reservoir Projects on Land Values, '
Journal of Farm Economics, Vol. 46, February, 1964, pp. 231-
243.
Knetsch, J. L. , "Land Values and Parks in Urban Fringe Areas [With
Discussion by W. M. Crosswhite], " Journal of Farm Economics,
Vol. 44, December, 1962, pp. 1718-1729.
Lichfield, N. , and H. Chapman, "Cost Benefit Analysis and Road Pro-
posals for a Shopping Centre. A Case Study: Edgware, " Journal
of Transport Economics and Policy, Vol. 2, No. 3, September,
1968, pp. 280-320.
Lichfield, N. , "Cost-Benefit Analysis in Urban Development: A Case
Study: Swanley, " Regional Science Association, Papers and Pro-
ceedings, Vol. 16, 1966, pp. 129-153.
Lind, R. C. , "Spatial Equilibrium, Rents, and Public Program Bene-
fits, " _Qu_ajrJijyily_Jj:mxn^^ Vol. 87, No. 2, May,
1973, pp. 188-207.
Loewenstein, Louis K. , "The Location of Urban Land Uses, " Land
Economics, Vol. 39, November, 1963, pp. 407-420.
Mason, J. B. , "Along the Interstate: Highway Interchange Land Use
Development, " Growth and Change, Vol. 4, No. 4, October,
1973, pp. 38-43.
Mason, J. B. , and C. T. Moore, "A Note on Interchange Location
Practices by Developers of Major Retail Centers, " Land Eco-
nomics. Vol. 48, No. 2, May, 1972, pp. 184-187.
Mills, E. S. , "Markets and Efficient Resource Allocation in Urban
Areas, " Swedish Journal of Economics, Vol. 74, No. 1, March,
1972, pp. 100-113.
6.45
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Moncrieff, P. M. , and W. E. Phillips, "Rural-Urban Interface Acre-
age Developments: Some Observations and Public Policy Impli-
cations, " Canadian Journal of Agricultural Economics, Vol. 20,
No. 1, February, 1972, pp. 80-84.
Montesano, A. , "A Restatement of Beckmann's Model on the Distribu-
tion of Urban Rent and Residential Density, " Journal of Economic
Theory, Vol. 4, No. 2, April, 1972, pp. 329-354.
Moses, L. , and H. F. Williamson, Jr. , "The Location of Economic
Activity in Cities, " American Economic Association, Papers
and Proceedings. Vol. 57, May, 1967, pp. 211-222.
Murray, B. B. , "Central City Expenditures and Out-Migration to the
Fringe, " Land Economics, Vol. 45, No. 4, November, 1969,
pp. 471-474.
Muth, R. F. , "The Derived Demand for Urban Land, " Urban Studies.
Vol. 8, No. 3, October, ]97i, pp. 243-254.
Muth, R. F. , "An Econometric Simulation Model of Intra-Metropolitan
Housing Location: Housing, Business, Transportation, and Local
Government: Discussion, " American Economic Review. Vol. 62,
No. 2, May, 1972, pp. 98-99.
Muth, Richard F. , "Moving Costs and Housing Expenditures, " Journal
of Urban Economics, Vol. 1, No. 1, January, 1974, pp. 108-125.
Muth, R. F. , "The Spatial Structure of the Housing Market, " Regional
Science Association, Papers and Proceedings, Vol. 7, 1961,
pp. 207-220.
Nourse, H. O., "The Effect of Public Housing on Property Values in
St. Louis, " Land Economics. Vol. 39, November, 1963,
pp. 433-441.
Nourse, H. O. , "The Effects of Air Pollution on House Values, " Land
Economics. Vol. 43, May, 1967, pp. 181-189.
Gates, W. E. , E. P. Howrey, and W. J. Baumol, "The Analysis of
Public Policy in Dynamic Urban Models, " Journal of Political
Economy. Vol. 79, No. 1, January-February, 1971, pp. 142-153.
6.46
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Olsen, E. O. , "A Competitive Theory of the Housing Market, "
American Economic Review, Vol. 59, No. 4, pt. 1, September,
1969, pp. 612-622.
Olsen, E. O. , "Subsidized Housing in a Competitive Market: Reply, "
American Economic Review, Vol. 61, No. 1, March, 1971,
pp. 220-224.
Oron, Y. , D. Pines, and E. Sheshinski, "Optimum vs. Equilibrium
Land Use Pattern and Congestion Toll, " Bell Journal of Eco-
nomics and Management Science, Vol. 4, No. 2, Autumn, 1973,
pp. 619-636.
Papageorgiou, G. J. , "The Impact of the Environment Upon the Spatial
Distribution of Population and Land Values, " jCc_on.onaic Geog-
raphy. Vol. 49, No. 3, July, 1973, pp. 251-256.
Poole, R. W. , "State-Local Taxes and Industrial Location, " New
Mexico Business, Vol. 23, No. 6, June, 1970, pp. 5-12.
Rancich, M. T. , "Land Value Changes in an Area Undergoing Urban-
ization, " LajTdJEjconomlcs_, Vol. 46, No. 1, February, 1970,
pp. 32-40.
Raup, P. M. , "Economic Development and Competition for Land Use
in the United States [With Discussion by W. L. Gibson, Jr.],"
Journal of Farm Economics, Vol. 39, December, 1957,
pp. 1514-1528.
Renaud, B. M. , "On a Neoclassical Model of Land Use, " Swedish
Journal of Economics, Vol. 74, No. 3, September, 1972,
pp. 400-404.
Ridker, R. G. , and J. A. Henning, "The Determinants of Residential
Property Values With Specific Reference to Air Pollution [In St.
Louis, Missouri], " Review of Economics and Statistics, Vol. 49,
May, 1967, pp. 246-257.
Ruzavina, E. , "Economic Aspects in the Urbanization Process, " Prob-
lems of Economics, Vol. 12, No. 4, August, 1969, pp. 68-79.
Sargent, F. O. , "The Resource Allocation Process: A Distinguishing
Characteristic of Land Economics, " Land Economics, Vol. 40,
August, 1964, pp. 315-318.
6. 47
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Scott, A. J. , "Spatial Equilibrium and the Central City, " Journal of
Regional Science, Vol. 9, No. 1, April, 1969, pp. 29-45.
Seskin, E. P. , "Residential Choice and Air Pollution: A General
Equilibrium Model, " American Economic Review, Vol. 63,
No. 5, December, 1973, pp. 960-967.
Solomon, R. J. , "Property Values as a Structural Element of Urban
Evolution, " Economic Geography, Vol. 45, No. 1, January,
1969, pp. 1-29.
Solow, R. M. , and W. S. Vickrey, "Land Use in a Long Narrow City, "
Journal of Economic Theory, Vol. 3, No. 4, December, 1971,
pp. 430-437.
Stebelsky, I. , "The Location of Urban Land Uses: A Reply [Followed
by L. K. Loewenst(-:;n's Rejoinder]," Land Economics, Vol. 43,
May, 1967, pp. 232-239.
Theiler, D. F. , "Effects of Flood Protection on Lund Use in the Coon
Creek, Wisconsin, Watershed, " Water Resources Research,
Vol. 5, No. 6, December, 1969, pp. 1216-1222.
Tolley, George S. , "The Welfare Economics of City Bigness, " Journal
of Urban Economics, Vol. 1, No. 3, July, 1974, pp. 324-345.
Tullock, G. , "Subsidized Housing in a Competitive Market: Comment, "
American Economic Review, Vol. 6l, No. 1, March, 1971,
pp. 218-219.
Weicher, J. C. , and R. H. Zerbst, "The Externalities of Neighborhood
Parks: An Empirical Investigation, " Land Economics, Vol. 49,
No. 1, February, 1973, pp. 99-105.
Weicher, J. C. , "A Test of Jane Jacobs' Theory of Successful Neigh-
borhoods, " Journal of Regional Science, Vol. 13, No. 1, April,
1973, pp. 29-40.
Weiand, K. F. , "Air Pollution and Property Values: A Study of the
St. Louis Area, " Journal of Regional Science, Vol. 13, No. 1,
April, 1973, pp. 91-95.
6.48
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Wilson, A. G. , "Developments of Some Elementary Residential Loca-
tion Models, " Journal of Regional Science, Vol. 9, No. 3,
December, 1969,^pp. 377-385.
Wingo, L. , Jr. , "An Economic Model of the Utilization of Urban Land
for Residential Purposes, " Regional Science Association, Papers
and Proceedings, Vol. 7, 1961, pp. 191-205.
6.3.4 Municipal Zoning
Anderson, Robert M. , and Bruce B. Roswig, Planning, Zoning, and
Subdivision: A Summary of Statutory Law in the 50 States, New
York, New York, New York State Federation of Official Planning
Organizations, 1966.
Andrews, Richard B. (ed, ), Urban Land Use Policy: The Central City,
New York, New York, The Free Pre; s, 1972.
Bair, Frederick H. , and Ernest R. Bartley, The Text of a Model Zoning
Ordinance, With Commentary, Chicago, Illinois, American
Society of Planning Officials, I960.
Block, William J. , Rural Zoning: People, Property, and Public Policy,
Bozeman, Montana, Montana State University, 1968.
Craig, James B. , The Legal Basis for Planning and Zoning in Pennsyl-
vania, University Park, Pennsylvania, The Institute of Public
Administration, Pennsylvania State University, 1965.
Crawford, Clan, Handbook of Zoning and Land Use Ordinances: With
Forms, Englewood Cliffs, New Jersey, Prentice-Hall, 1974.
Feiler, M. H. , "Zoning: A Guide to Judicial Review, " Journal of Urban
Law, Vol. 47, No. 2, Winter, 1969, pp. 319-343.
Haar, C. M. , Land-Use Planning: A Casebook on the Use, Misuse.
and Re-Use of Urban Land. Boston, Massachusetts, Little,
Brown, 1959.
Jackson, R. , "Zoning to Regulate On-Water Recreation, " Land Eco-
nomics. Vol. 47, No. 4, November, 1971, pp. 382-388.
6.49
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Krasnowiecki, Jan, Legal Aspects of Planned Unit Residential Develop-
ment, With Suggested Legislation, Washington, B.C., Urban
Land Institute, 1965.
Lieberman, Barnet, and Walter W. Rabin, Law of Zoning in Pennsyl-
vania, Philadelphia, Pennsylvania, G. T. Bisel Co. , 1958.
Linowes, R. Robert, The Pol'Hes of Land Use, Planning, Zoning, and
the Private Developer, New York, New York, Praeger, 1973.
Maisel, S. J. , and L. Winnick, "Family Housing Expenditures: Elu-
sive Laws and Intrusive Variances, " in Irwin Friend and Robert
Jones (eds.), Consumption and Saving, Vols. I and II. Philadel-
phia, Pennsylvania, University of Pennsylvania, I960, Vol. I,
pp. 359-435.
M-cChesney, Frank, Zoning: Insurance for Livability, Harrisburg,
Pennsylvania, Commonwealth of Pennsylvania, Department of
Internal Affairs, 1962.
Minano, D. R. , "Aesthetic Zoning: The Creation of a New Standard, "
Journal of Urban Law, Vol. 48, No. 3, April, 1971. pp. 740-754.
Mogrer,, Edward G. , and Wi]l.>ur S. Smith, Zoning and Traffic, Sauga-
tuck, Connecticut, Eno Foundation for Highway Traffic Control,
1952.
Morse, Henry F. , The Role of the Slates in Guiding Land Use in Flood
Plains, Georgia Institute of Technology, Atlanta - State Engineer-
ing Experiment Station, Special Report No. 38, 1962.
Murphy, Francis C. , Regulating Flood Plain Development, Chicago,
Illinois, University of Chicago, Department of Geography,
Research Paper No. 56, 1958.
National Commission on Urban Problems, Problems of Zoning and
Land-Use Regulation, Washington, D.C., Communication Service
Corporation, 1968.
Natoli, S. J. , "Zoning and the Development of Urban Land Use Patterns,
Economic Geography, Vol. 47, No. 2, April, 1971, pp. 171-184.
6.50
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Schoenbrod, D., "Large Lot Zoning, " Yale Law Journal. Vol. 78,
No. 8, July, 1969, pp. 1418-1441.
Scott, John N. , "Toward a Strategy for Utilization of Contract and Con-
ditional Zoning, " Jjoj.irjn^l_^JUr^aji_J_,a;w, Vol. 51, No. 1, August,
1973, pp. 94-111.
Shenkel, W. M. , "The Economic Consequences of Industrial Zoning, "
Land Economics, Vol. 40, August, 1964, pp. 255-265.
Smith, Herbert H. , The Citizen's Guide to Zoning, W. Trenton, New
Jersey, Chandler-Davis Publishing Co. , 1965.
Toll, Seymour I. , Zoned American, New York, New York, Grossman
Publishers, 1969.
Tough, R. , and G. D. MacDonald, "The New Zoning and New York
City's New Look, " Land Economics, Vol. 41, February, 1965,
pp. 41-48.
U. S. Department of Agriculture, Zoning: An Aid to Community
Resource Development, Washington, D. C. , U. S. Government
Printing Office, 1967.
U. S. Economic Development Administration, Zoning for Small Towns
and Rural Counties, Washington, D. C. , U. S. Government
Printing Office, 1966.
U. S. Housing and Hoine Finance Agency, Comparative Digest of
Municipal and County Zoning Enabling Statutes for Reference in
Community Planning, Housing, Slum Clearance, and Urban
Redevelopment Programs, As of October 31, 1952, Washington,
D. C. , U. S. Government Printing Office, 1953.
U. S. Public Roads Bureau, Highway and Land Administration Division,
Highway Transportation Criteria in Zoning Law, by W. H.
Stanhagen; and Police Power and Planning Controls for Arterial
Streets, by W. H. Stanhagan and J. J. Mullins, I960.
University of Pittsburgh, Institute of Local Government, Rules and
Regulations and Forms for Zoning Boards of AdJDstment, Revised
Edition, Pittsburgh, Pennsylvania, 1959.
6.51
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Whipple, W. , Jr. , "Optimizing Investment in Flood Control and Flood
Plain Zoning, " Water Resources Research, Vol. 5, No. 4,
August, 1969, pp. 761-766.
Williams, Norman, Jr. , The Structure of Urban Zoning, New York,
New York, Buttenheim Publishing Corp. , 1966.
Willhelm, Sidney M. , Urban Zoning and Land Use Theory, New York,
New York, Free Press of Glencoe, 1962.
Wolffe, Leonard L. , New Zoning Landmarks in Planned Unit Develop-
ments, Washington, D.C., Urban Land Institute, 1968.
Wood, D. F. , "Wisconsin's Statewide Requirements for Shoreland and
Flood Plain Zoning, " Natural Resources Journal, Vol. 10, No. 2,
, April, 1970, pp. 327-338.
Yaseen, D. W. , "The Interstate Commercial Zone: An Industrial
Location Factor, " Land Economics, Vol. 42, February, 1966,
pp. 107-112.
Yokley, Emmett C. , Zoning Law and Practice, 2nd Edition, Charlottes-
ville, Virginia, Michie Co. , 1953.
6.3.5 Eminent Domain and Compensation
Bailey, Martin J. , "The Interpretation and Application of the Compen-
sation Principle, " Economic Journal, Vol. 64, March, 1954,
pp. 39-52.
Dobb, M. H. , "A Note on Index-Numbers and Compensation Criteria, "
Oxford Economic Papers, N.S., Vol. 8, February, 1956,
pp. 78-79.
Ebenstein, William, The Law of Public Housing, Madison, Wisconsin,
University of Wisconsin Press, 1940.
Falk, Richard A. , and Lyman M. Tondel, Jr. (eds. ), The Aftermath
of Sabbatino: Background Papers and Proceedings of the Seventh
Hammarskjold Forum. New York, January 11, 1965, Dobbs
Ferry, New York, Oceana Publications, 1965.
6.52
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Hering, Barbara G. , and Marilyn G. Ordover, Theory and Practice in
Inverse Condemnation for Five Representative States. Washington,
D.C., Highway Research Board, National Research Council, 1969.
Holzman, R. S. , "How to Cope With 'Unreasonable Compensation1
Claims, " Harvard Business Review, Vol. 49, No. 5, September-
October, 1971, pp. 79-81.
House, P. A. , "Relocation of Families Displaced by Expressway
Development: Milwaukee Case Study, " Land Economics. Vol. 46,
No. 1, February, 1970, pp. 75-78.
Kaltenbach, Henry J. , Master Guide to the Successful Handling of Con-
demnation Valuation, Englewood Cliffs, New Jersey, Executive
Reports Corporation, 1972.
Long, Jeremiah M., and Charles E. Watts, Rules of Discovery and
Disclosure in Highway Condemnation Proceedings, Washington,
D.C. , Highway Research Board of the Division of Engineering,
National Research Council, National Academy of Sciences-
National Academy of Engineering, 1970.
McAuliffe, J. W. , and F. S. Sengstock, "What is the Price of Eminent
Domain? An Introduction to the Problems of Valuation in Eminent
Domain Proceedings, " Journal of Urban La\v, Vol. 44, No. 2,
Winter, 1966, pp. 185-230.
Mishan, E. J. , "The Principle of Compensation Reconsidered, "
Journal of Political Economy, Vol. 60, August, 1952, pp. 312-
322.
Mishan, E. J. , "Welfare Criteria: Are Compensation Tests Neces-
sary? " Ec^n^mixjjournal, Vol. 73, June, 1963, pp. 342-350.
Neutze, M. , "The Price of Land for Urban Development, " Economic
Record. Vol. 46, No. 115, September, 1970, pp. 313-328.
Pennsylvania Laws and Statutes, Eminent Domain Code as Amended,
With Comments and Notes, Harrisburg, Pennsylvania, General
Assembly of the Commonwealth of Pennsylvania, Joint State
Government Commission, 3972.
6.53
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Pole, D., "Pareto and the Compensating Principle: A Note, " Economic
Journal. Vol. 65, March, 1955, pp. 156-157,
Polinsky, A. M. , "Probabilistic Compensation Criteria, " Quarterly
Journal of Economics, Vol. 86, No. 3, August, 1972, pp. 407-
425.
Rams, Edwin M. (compiler), Valuation for Eminent Domain, Engle-
wood Cliffs, New Jersey, Prentice-Hall, 1973.
Schmutz, George LeRoy, Condemnation Appraisal Handbook, Rev. and
Enl. by Edwin M. Rams, Englewood Cliffs, New Jersey, Prentice-
Hall, 1963.
Sharma, P. K. , "The Basis of Compensation for Land, " Indian Journal
of Economics. Vol. 39, July, 1958, pp. 99-104.
Shoup, Donald C. , and Ruth P. Mack, Advance Land Acquisition by
Local Governments: Benefit-Cost Analysis as an Aid to Policy,
New York, New York, Institute of Public Administration, for the
U. S. Department of Housing and Urban Development, 1968.
Slasor, G. , "A Note on Compensation Tests, " Economica, N. S. ,
Vol. 28, November, 1961, pp. 415-420.
Tideman, T. Nicholas, Land Use Control Through Administered Com-
pensation, Harvard University, Program on Regional and Urban
Economics, Discussion Paper No. 59, February, 1970.
U. S. Advisory Commission on Intergovernmental Relations, Reloca-
tion: Unequal Treatment of People and Businesses Displaced by
Governments, "Washington, D. C. , 1965.
U. S. Bureau of Public Roads, Federal-Aid Highway Relocation Assis-
tance and Payment Statistics for Period October 1, 1968 to
September 30, 1969. Washington, D.C., 1970.
Usher, D. , "Political Risk [In Onwership of Property], " Economic
Development and Cultural Change, Vol. 13, July, 1965, pp. 453-
462.
Williams, Norman, Land Acquisition for Outdoor Recreation: Analysis
of Selected Legal Problems. Washington, D. C. , Outdoore Recre-
ation Resources Review Committee, 1962.
6.54
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Winch, D. M. , "Consumer's Surplus and the Compensation Principle, "
American Economic Review, Vol. 55, June, 1965, pp. 395-423.
Wisconsin University, Highway Condemnation Law and Litigation in
the United States, Washington, B.C., U. S. Bureau of Public
Roads, 1968.
6. 3. 6 Property Tax
Agados, A. M. , and P. R. Dunlap, "Elimination of Urban Blight
Through Inverse Proportional Ad Valorem Property Taxation, "
American Journal of Economics and Sociology, Vol. 32, No. 2,
April, 1973, pp. 143-152.
Bahl, R. W. , "A Land Speculation Model: The Role of the Property
Tax as a Constraint to Urban Sprawl, " Journal of Regional
Science. Vol. 8, No. 2, Winter, 1968.
Bails, D. , "An Alternative: The Land Value Tax, " American Journal
of Economics, and Sociology, Vol. 32, No. 3, July, 1973,
pp. 283-294.
Barlowe, R. , J. Ahl, and C. Bachrnan, "Use-Value Assessment Legis-
lation in the United States, " Land Economics, Vol. 49, No. 2,
May, 1973, pp. 206-212.
Bateman, W. , and P. Brown, "Some Reflections on Serrano vs. Priest, "
Journal of Urban Law, Vol. 49, No. 4, May, 1972, pp. 701-710.
Bird, R. M. , "A National Tax on the Unimproved Value of Land: The
Australian Experience, 1910-1952, " National Tax Journal,
Vol. 13, December, I960, pp. 386-392.
Black, D. E. , "The Nature and Extent of Effective Property Tax Rate
Variation Within the City of Boston, " National Tax Journal,
Vol. 25, No. 2, June, 1972, pp. 203-210.
Botha, D. J. , "Towards a New Variant of Property Taxation, " South
African Journal of Economics, Vol. 39, No. 1, March, 1971,
pp. 1-12.
Brewer, M. F. , "Local Government Assessment: Its Impact on Land
and Water Use, " Land Economics, Vol. 37, August, 1961,
pp. 207-217.
6. 55
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Brogden, J. C. , "An Experiment in Equity: Promise and Performance
[Los Angeles County Tax Appeals Board], " National Tax JournaL.
Vol. 20, June, 1967, pp. 180-192.
Brown, H. G. , and E. R. Brown, "Obstacles to Adoption of Land
Value Taxation: The Story of Meadville, " American Journal of
Economics and Sociology, Vol. 27, No. 4, October, 1968,
pp. 387-392.
Carberfc, L. E. , "Property Tax Exemptions as a Tool of Planning, "
in National Tax Association Proceedings of the Fifty-Eighth
Annual Conference, 1965, Harrisburg, Pennsylvania, National
Tax Association, 1966, pp. 234-245.
Chapman, W. E. , "Real Estate Tax Incentives, " National Tax Journal,
Vol. 26, No. 3, September, 1973, pp. 389-393.
Cheng, P. L. , "The Common Level of Assessment in Property Taxa-
tion, " NaJiojT^l_Tax_JJojurnal) Vol. 23, No. 1, March, 1970,
pp. 50-65.
Cheng, P. L. , and A. L. Edwards, "Compensatory Property Taxation:
An Alternative, " National Tax Journal, Vol. 12, September,
1959, pp. 270-275.
Coen, R. M. , and B. J. Powell, "Theory and Measurement of the
Incidence of Differential Property Taxes on Rental Housing, "
National Tax Journal, Vol. 25, No. 2, June, 1972, pp. 211-216.
Cord, S., "How Land Value Taxation Would Affect Homeowners, "
American Journal of Economics and Sociology. Vol. 32, No. 2,
April, 1973, pp. 153-154.
Cord, S. , "Prospect for Commercial Real Estate Under Land Value
Taxation, " American Journa_I of Economics and Sociology,
Vol. 29, No. 4, October, 1970, pp. 388-390.
Davis, O. A., and K. L. "Wertz, "The Consistency of the Assessment
of Property: Some Empirical Results and Managerial Sugges-
tions, " Aj£li^d_^conorruc_s_, Vol. 1, No. 2, May, 1969, pp. 151-
157.
DcSalvo, J. H. , "Effects of Property Tax on Operating and Investment
Decisions of Rental Properly Owners, " National Tax Joxirnal,
Vol. 24, No. 1, March, 1971, pp. 45-50.
6.56
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DeSalvo, J. S. , "Effects of the Property Tax on Operating and Invest-
ment Decisions of Rental Property Owners: Reply, " National
Tax Journal. Vol. 26, No. 1, March, 1973, pp. 129-131.
Gaffney, M. , "Land Rent, Taxation, and Public Policy, " American
Journal of Economics and Sociology, Vol. 31, No. 3, July, 1972,
pp. 241-258.
Goldberg, F. T. , "Equalization of Municipal Services: The Econoinics
of Serrano and Shaw, " Yale Law Journal, Vol. 82, No. 1,
November, 1972, pp. 89-122.
Goode, R. , "Tax Problems: Income, Consumption, and Property as
Bases of Taxation, " American Economic Association, Papers
and Proceedings, Vol. 52, May, 1962, pp. 327-334.
Grieson, R. E. , "Effects of the Property Tax on Operating and Invest-
ment Decisions of Rental Property Owners: A Note, " National
Tax Journal. Vol. 26, No. 1, March, 1973, pp. 127-128.
Gulati, I. S, , and V. N. Kothari, "Land Tax as an Incentive for Better
Land Utilisation. " Artha-Vikas. Vol. 5, No. 2, July, 1969,
pp. 108-116.
Hady, T. F. , "Differential Assessment of Farmland on the Rural -
Urban Fringe, " American Journal of Agricultural Economics,
Vol. 52, No. 1, February, 1970, pp. 25-32.
Hansen, B. , "Aspects of Property Taxation: A General Report, "
Public Finance. Vol. 15, No. 3-4, I960, pp. 199-219.
Harriss, C. L. , "Land Value Increment Taxation: Demise of the
British Betterment Levy, " National Tax Journal, Vol. 25,
No. 4, December, 1972, pp. 567-572.
Harriss, C. L. , "Valuations of Property for Taxation, " Public
Finance, Vol. 9, No. 1, 1954, pp. 24-40.
Heinberg, J. D. , and W. E. Dates, "The Incidence of Differential
Property Taxes on Rental Housing: An Addendum, " National
Tax Journal. Vol. 25, No. 2, June, 1972, pp. 221-222.
6.57
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Heinberg, J. D. , and W. E. Gates, "The Incidence of Differential
Property Taxes on Urban Housing: A Comment and Some Further
Evidence. " National Tax Journal, Vol. 23, No. 1, March, 1970,
pp. 92-98.
Henley, A. T. , "Land Value Taxation in California, " American Journal
of Economics and Sociology, Vol. 27, No. 4, October, 1968,
pp. 377-386.
House, P. W. , "The Preferential Assessment of Farmland, The
Maryland Experience, " Journal of Farm Economics, Vol. 43,
December, 19&1, pp. 1213-1214.
Howards, I. , "Property Tax Rate Limits in Illinois and Their Effect
Upon Local Government, " National Tax Journal, Vol. 16,
September, 1963, pp. 285-293.
Labovitz, I. M. , "The Property Tax: Quicksand or Bedrock? " in
National Tax Association Proceedings of the Fifty-Fourth Annual
Conference, 1961, Harrisburg, Pennsylvania, National Tax
Association, 1962, pp. 58-70.
Lefcoe, G. , "The Real Property Tax and Architecture: A Note on the
Seagram Case [In New York City], " Land Economics, Vol. 41,
February, 1965, pp. 57-62.
Lent, G. E. , "The Taxation of Land Values, " International Monetary
Fund Staff Papers, Vol. 14, March, 1967, pp. 89-121.
LeRoy, S, F. , "Property Tax Assessment: How Fair Is It? " Federal
Reserve Bank of Kansas City Monthly Review, July-August, 1973,
pp. 7-16.
Lindholm, R. W. , "Land Taxation and Economic Development, " Laud
Economics. Vol. 41, May, 1965, pp. 121-130.
Lindholm, Richard W. (ed. ), Property Taxation, U.S.A. , Proceedings,
Committee on Taxation, Resources, and Economic Development,
Madison, Milwaukee, London, University of Wisconsin Press,
1967.
6.58
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Lindholm, R. W. , "Twenty-One Land Value Taxation Questions and
Answers, " American Journal of Economics and Sociology,
Vol. 31, No. 2, April, 1972, pp. 153-161.
Lockner, A. O. , and H. J. Kim, "Circuit-Breakers on Farm-Property-
Tax Overload: A Case Study, " National Tax Journal, Vol. 26,
No. 2, June, 1973, pp. 233-240.
Macy, C. W. , "Property Tax Limitations Re-Examined, " in National
Tax Association Proceedings of the Fifty-Fifth Annual Confer-
ence, 1962, Harrisburg, Pennsylvania, National Tax Association,
1963, pp. 481-497.
McKie, Robert, and W. K. Kumar, "House Improvement and Rateable
Values, " Urban Studies. Vol. 8, No. 2, June, 1971, pp. 147-150.
Moffitt, L. C. , "Planning and Assessing Practice, " Land Economics,
Vol. 42, August, 1966, pp. 371-378.
Netzer, D., "The Property Tax and Alternatives in Urban Development, "
Regional Science Association, Papers and Proceedings, Vol. 9>
1962, pp. 191-200.
Oldman, O. , and H. Aaron, "Assessment-Sales Ratios Under the
Boston Property Tax, " National Tax Journal, Vol. 18, March,
1965, pp. 36-49. [Errata: Vol. 18, September, 1965, p. 333.]
Orr, L. L. , "The Incidence of Differential Property Taxes on Urban
Housing, " National Tax Journal, Vol. 21, No. 3, September,
1968, pp. 253-262.
Orr, L. L. , "The Incidence of Differential Property Taxes: A
Response, " National Tax Journal, Vol. 23, No. 1, March, 1970,
pp. 99-101.
Orr, L. L. , "The Incidence of Differential Property Taxes on Urban
Housing: Reply, " National Tax Journal, Vol. 25, No. 2, June,
1972, pp. 217-220.
Prentice, P. K. , "Case for Taxing Location Values, " American
Journal of Economics and Sociology, Vol. 28, No. 2, April,
1969, pp. 145-158.
6.59
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Property Tax. The. Symposium, Tax Institute of America, November
2-4, 1966, Princeton, Tax Institute of America, 1967.
Ritter, F. A. , "An Appraisal of Measures of Residential Land Value, "
Economic Geography, Vol. 42, No. 7, April, 1971, pp. 185-191.
Romans, J. T. , "On the Measurement of Assessment Error, " National
Tax Journal. Vol. 23, No. 1, March, 1970, pp. 89-91.
Ross, M. H. , "The Property Tax Assessinent Review Process: A
Cause for Regressive Property Taxation?" National Tax Journal,
Vol. 24, No. 1, March, 1971, pp. 37-43.
Rybeck, Walter, "Can the Property Tax Be Made to Work?" American
Journal of Economics and Sociology, Vol. 33, No. 3, July, 1974,
pp. 259-271.
Sazama, G. W. , "Land Taxes -- Prerequisites and Obstacles,"
National Tax Journal, Vol. 23, No. 3, September, 1970,
pp. 315-323.
Schaaf, A. H. , "Effects of Property Taxation on Slums and Renewal:
A Study of Land-improvement Assessment Ratios, " Land Eco-
nomics, Vol. 45, No. 1, February, 1969, pp. 111-116.
Schoettle, F. P. , "Judicial Requirements for School and Property Tax
Redesign: The Rapidly Evolving Case Law, " National Tax Journal,
Vol. 25, No. 3, September, 1972, pp. 455-472.
Skouras, A. , "On the Analysis of Property Tax Effects on Operating
and Investment Decisions of Rental Property Owners, " National
Tax Journal, Vol. 26, No. 1, March, 1973, pp. 123-125.
Smith, T. R. , "Land Value vs. Real Property Taxation: A Case Study
Comparison," Land Economics, Vol. 46, No. 3, August, 1970,
pp. 305-313.
Stiles, L. A. , "Financing Government in the Suburbs -- The Role of
the Property Tax, " in National Tax Association Proceedings of
the Fifty-Fourth Annual Conference. 1961, Harrisburg,
Pennsylvania, National Tax Association, 1962, pp. 52-57.
6.60
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Stober, W. J. , and L. H. Falk, "Property Tax Exemption: An Ineffi-
cient Subsidy to Industry (Louisiana), " National Tax Journal.
Vol. 2, December, 1967, pp. 386-394.
Stocker, F. D. , "How Should We Tax Farmland in the Rural-Urban
Fringe, " in National Tax Association Proceedings of the Fifty-
Fifth Annual Conference, 1962, Harrisburg, Pennsylvania,
National Tax Association, 1963, pp. 463-471.
Trestrail, R. W. , "Forests and the Property Tax -- Unsound Accepted
Theory. " National Tax Journal, Vol. 22, No. 3, September, 1969,
pp. 347-356.
U. S. Department of Housing and Urban Development, A Study of Prop-
erty Taxes and Urban Blight, Washington, D. C. , U. S. Govern-
ment Printing Office, 1973.
Van Vuuren, W. , "An Evaluation of Ontario's Farm Assessment Pro-
posals for Property Taxation, " Canadian Journal of Agricultural
Economics, Vol. 18, No. 2, July, 1970, pp. 87-94.
6.61
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6.3.7 Land Use Planning and Controls
Ackcrman, B. , "More on Slum Housing and Redistribution Policy: A
Reply to Professor Komesar, " Yale Law Journal, Vol. 82, No. 6,
May, 1973, pp. U94-1Z07.
Ackerman, B. , "Regulating Slum Housing Markets on Behalf of the
Poor: Of Housing Codes, Housing Subsidies and Income Distribu-
tion Policy, " YaJ^JLa-wJ^urnalj Vol. 80, No. 6, May, 1971,
pp. 1093-1197.
Ascher, C. S. , "City Planning, Administration, and Politics, " Land
Economics, Vol. 30, November, 1954, pp. 320-328.
Baker, H. L. , "Hawaii's New Approach to Land Use Regulation, "
Journal of Farm Economics, Vol. 44, December, 1962, pp. 1745-
1748.
Baldwin, M. F., "Historical Preservation in the Context of Environ-
mental Law: Mutual Interest in Amenity, " Law and Contempo-
rary Problems, Vol. 36, No. 1, Summer, 1971, pp. 432-441.
Barkley, P. W. , "Economic Effects of Taking Parts of Farms for
Flood-Control Reservoirs, " Journal of Farm Economics,
Vol. 47, December, 1965, pp. 1474-1478.
Bell, C. J. , "Controlling Residential Development on the Urban
Fringe: St. Louis County, Missouri, " Journal of Urban Law,
Vol. 48, No. 2, Winter, 1970, pp. 409-447.
Beuscher, J. H. , "Making Land Laws Serve Economic Ends, " Journal
of Farm Economics, Vol. 37, December, 1955, pp. 1143-1153.
Boyce, R. R. , "Myth Versus Reality in Urban Planning, " Land Eco-
nomics. Vol. 39, August, 1963, pp. 241-251.
Branfman, E. J. , B. I. Cohen, and D. M. Trubek, "Measuring the
Invisible Wall: Land Use Controls and Residential Patterns of
the Poor, " Yale Law Journal, Vol. 82, No. 3, January, 1973,
pp. 483-508.
6.62
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Brinscr, A., "Progress in Dealing with Measurement and Quality
Problems in Planning Land and Water Use, " Journal of Farm
Economics. Vol. 44, December, 196Z, pp. 1672-1683.
Brown, J. P. , B. Contini, and C. B. McGuire, "An Economic Model
of Floodplain Land Use and Land Use Policy, " Water Resources
Research, Vol. 8, No. 1, February, 1972, pp. 18-32.
Brown, R. K. , "The Dilemma of Urban Planning, " Land Economics,
Vol. 37, August, 1961, pp. 260-263.
Burke, D. B. , Jr., "Redrafting Municipal Housing Codes, " Journal of
Urban Law. Vol. 48, No. 4, June, 1971, pp. 933-954.
Burke, D. B. , Jr., "Toward a Right of Control Over the City Planning
Process, " Journal of Urban Law, Vol. 47, No. 1, Fall, 1969,
pp. 69-83.
Burroughs, R. J. , "Should Urban Land Be Publicly Owned ?" Land
Economics, Vol. 42, February, 1966, pp. 11-20.
Caldwell, L. K. , "The Ecosystem as a Criterion for Public Land
Policy, " Natural Resources Journal, Vol. 10, No. 2, April,
1970, pp. 203-221.
Clark, James F. , "A Population Redistribution Proposal: Put Orwell
at the Pump, " Journal of Urban Law, Vol. 51, No. 1, August,
1973, pp. 1-24.
Coke, J. G. , and C. S. Liebman, "Political Values and Population
Density Control. " Land Economics, Vol. 37, November, 1961,
pp. 347-361.
Costonis, J. J. , "Development Rights Transfer: An Exploratory
Essay. " Yale Law Journal, Vol. 83, No. 1, November, 1973,
pp. 75-128.
Council on Environmental Quality, "Preparation of Environmental
Impact Statements: Guidelines, " Federal Register, Vol. 38,
No. 147, Part II, August, 1973.
Cox, P. T. , A. L. Haught, and E. H. Zube, "Visual Quality Consid-
erations in Regional Land Use Changes, " Growth and Change,
Vol. 3, No. 2, April, 1972, pp. 9-15.
6.63
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Cox, Walter E. , and Henry R. Burt, "Administration of Development
Control: Legal and Economic Considerations, " Report prepared
for the County of Fairfax, Virginia, by Daniel A. Robinson and
Associates, Charlottesville, Virginia, 1973.
Cusick, P. J., Jr., "Valuing, Paying for, and Providing Open Space
in Urban Fringe Areas [With Discussion by J. B. Kohlmeyer], "
Journal of Farm Economics, Vol. 44, December, 1962, pp. 1697
1706.
Day, J. C. , "A Linear Programming Approach to Floodplain Land Use
Planning in Urban Areas, " American Journal of Agricultural
Economics, Vol. 55, No. 2, May, 1973, pp. 165-174.
Delafons, John, Land Use Controls in the United States, Cambridge,
Massachusetts, Joint Center for Urban Studies of the Massachu-
setts Institute of Technology and Harvard University, 1962.
Droege, J. F. , "Frontland Taking - Backland Value, " Natural
Resources JournaL Vol. 9, No, 2, April, 1969,
Duggar, G. , "A Framework for the Analysis of Urban Development
Policy: Some Financial Factors in Local Programs and Some
Implications, " Regional Science Association, Proceedings,
Vol. 2, 1956, pp. 210-224.
Dunham, A. , "City Planning: An Analysis of the Content of the Master
Plan, " Journal of Law and Economics. Vol. 1, October, 1958,
pp. 170-186.
Fagin, H. , "Planning Organization and Activities Within the Frame-
work of Urban Government, " in Harvey S. Perloff (ed. ), Plan-
ning and the Urban Community. Pittsburgh, Pennsylvania,
University of Pittsburgh Press, 196l, pp. 105-129.
Farhi, Andre, "Urban Economic Growth and Conflicts: A Theoretical
Approach, " Papers of the Regional Science Association. Vol. 31,
1973, pp. 95-124.
Freilich, R. H. , "Interim Development Controls: Essential Tools for
Implementing Flexible Planning and Zoning, " Journal of Urban
Law. Vol. 49, No. 1, August, 1971, pp. 65-119.
6.64
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Goodman, R. , "A Safe Place to Live: Exploring Safety Standards and
Codes in the Cities, " Journal of Urban Law, Vol. 44, No. 2,
Winter, 1966, pp. 341-349.
Goodpaster, G. S. , "An Introduction to the Community Development
Corporation, " Journal of Urban Law, Vol. 46, No. 3, Spring,
1969, pp. 603-665.
Grossman, H. J., "Municipal Planning Expenditures in a Suburban
County: Montgomery County, Pennsylvania, " Land Economics,
Vol. 39, August, 1963, pp. 298-303.
Hallman, H. W. , "Growth Control: A Proposal for Handling Scattered
Metropolitan Development, " Land Economics, Vol. 33, February,
1957, pp. 80-83.
Hanson, A. H. , "Development Corporations, " Yorkshire Bulletin of
Economic and Social Research, Vol. 13, May, 1961, pp. 41-50.
Hayek, F. A. , "The Economics of Development. Changes, " Financial
Times, April 26, 27, 28, 1949, inF. A. Hayek, Studies in
Philosophy, Politics, and Economics, Chicago, University of
Chicago Press, 1967.
Heideman, M. L. , Jr., "Public Implementation and Incentive Devices
for Innovation and Experiment in Planned Unit Development, "
Land Economics. Vol. 45, No. 2, May, 1969, pp. 262-266.
Kaplan, M. , "The Planner, General Planning, and the City, " Land
Economics, Vol. 40, August, 1964, pp. 295-302.
Kellenberger, A. N. , "Special Assessments Levied Against Railroad
Rights-of-Way, " in National Tax Association Proceedings of the
Fifty-Eighth Annual Conference, 1965, Harrisburg, Pennsylvania,
National Tax Association, 1966, pp. 197-203.
Kendrick, D. , "Numerical Models for Urban Planning, " Swedish
Journal of Economics, Vol. 74, No. 1, March, 1972, pp. 45-67.
Komcsar, N. K. , "Return to Slumville: A Critique of the Ackerman
Analysis of Housing Code Enforcement and the Poor, " Yale Law
Journal, Vol. 82, No. 6, May, 1973, pp. 1175-1193.
6.65
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Kotler, M. , "The Politics of Community Economic Development, " Law
and Contemporary Problems. Vol. 36, No. 1, Winter, 1971,
pp. 3-12.
Lim, W. S. , "Towards a Planned Urban Environment, " International
Social Science Journal, Vol. 22, No. 4, 1970, pp. 672-680.
Loflin, J. J. , J. L. Rankin, and N. Marcus, "Historic Preservation in
the American City: A New York Case Study, " Law and Contempo-
rary Problems, Vol. 36, No. 3, Summer, 1971, pp. 362-385.
Lombard, J. A. , "Planning and the Market Mechanism: An Assess -
ment," South African Journal of Economics, Vol. 39, No. 2,
June, 1971, pp. 112-122.
Mandelker, D. R. , "Housing Codes, Building Demolition, and Just
Compensation: A Rationale for the Exercise of Public Powers
Over Slum Housing, " Michigan Law Review, Vol. 67, No. 4,
February, 1969, pp. 635-678,
Marcus, M. , and M. K. Taussig, "A Proposal for Government Insur-
ance of Home Values Against Locational Risk, " Land__Economi cs,
Vol. 46, No. 4, November, 1970, pp. 404-413.
Miller, L. C. , Jr. , "The Economics of Housing Code Enforcement, "
Land Economics. Vol. 49, No. 1, February, 1973, pp. 92-96.
Muiiby, D. L. , "Development Charges and the Compensation-Betterment
Problem, " Economic Journal, Vol. 64, March, 1954, pp. 87-97.
Myhra, D. , "A-95 Review and the Urban Planning Process, " Journal
of Urban Law. Vol. 50, No. 3, February, 1973, pp. 449-463.
Neuberger, H. , "User Benefit: Transport and Land Use Plans, "
Journal of Transport Economics and Policy, Vol. 5, No. 1,
January, 1971, pp. 96-99.
Neutze, G. Max, The Price of Land and Land Use Planning: Policy
Instruments in the Urban Land Market, Paris, France, Organi-
zation for Economic Co-Operation and Development, 1973.
6.66
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Noya, O. J., and Stribling, T. B. , "Subdivision Planning Through
Water Regulation in New Mexico, " Natural Resources Journal,
Vol. 12, No. 2, April, 1972, pp. 286-297.
Otto son, Howard W. (cd. ), Land Use Policy and Problems in the JJmted
Stales, Lincoln, Nebraska, University of Nebraska Press, 1963.
Polatsek, D. F., '"Who Goes There?1 - The Right of Entry and Housing
Code Enforcement, " Journal of Urban Law, Vol. 46, No. 2,
Winter, 1968, pp. 269-284.
Prescott, J. R. , and W. C. Lewis, "State and Municipal Location
Incentives: A Discriminant Analysis, " National Tax Journal,
Vol. 22, No. 3, September, 1969, pp. 399-407.
Robin, R. S., "A Taxpayer's Choice Incentive System: An Experi-
mental Approach to Community Development Tax Incentives, "
Law and Contemporary Problems, Vol. 36, No. I, Winter, 1971,
pp. 99-118.
Rose, Jerome G. , "New Direction in Planning Law: A Review of the
1972-1973 Judicial Decisions, " A1P Journal.. July. 1974, pp. 243-
254.
Rose, Jerome G. , "A Proposal for the Separation and Development
Rights as a Technique to Preserve Open Space, " Journal of Urban
Law. Vol. 51, No. 3, February, 1974, pp. 461-489.
Scheele, D. S. , "Urban Housing: An Apologetic for a Radical Gestalt:
Features of a Housing Market Mechanism to Promote Initiative
and Excellence, " Journal of Urban Law, Vol. 45, No. 2, Winter,
1967, pp. 347-384.
Schuster, E. G. , and H. H. Webster, "Costs of Outdoor Recreation
Land-Use Controls, " Land Economics, Vol. 48, No. 4, November,
1972, pp. 392-396.
Smith, S. C. , "New Approaches in Organizing for Land and Water Use
[With Discussion by R. C. Otte], " Journal of Farm Economics,
Vol. 44, December, 1962, pp. 1684-1696.
Stegnian, M. A., "National Housing and Land-Use Policy Conflicts,"
Journal of Urban Law, Vol. 49, No. 4, May, 1972, pp. 629-666.
6.67
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"Strategies for Controlling Growth, " Public Management, Vol. 56,
No. 5, May, 1974.
Sturdivant, F. D. , "Community Development Corporations: The Prob-
lem of Mixed Objectives, " Law and Contemporary Problems,
Vol. 36, No. 1, Winter, 1971, pp. 35-50.
Sussna, S. , "Environmental Control and Land Use, " Journal of Urban
Law, Vol. 48, No. 3, April, 1971, pp. 689-700.
Teeguarden, D. E. , "Allocating Public Timber by Transferable Pur-
chasing Quotas: A Policy Analysis, " Natural Resources Journal,
Vol. 9, No. 4, October, 1969, pp. 576-589.
Thome, Wynne (ed. ), Land and Water Use: A Symposium Presented at
the Denver Meeting of the American Association for the Advance-
ment of Science, 27-29 December 1961, Washington, D. C. ,
American Association for the Advancement of Science, 1963.
Turvey, Ralph, "Development Charges and the Compensation-Betterment
Problem. " Economic Journal, Vol. 63, June, 1953, pp. 299-317.
Turvey, Ralph, "Development Charges and the Compensation-Betterment
Problem: A Rejoiner, " Economic Journal, Vol. 64, June, 1954,
pp. 358-360.
Turvey, Ralph, "Recoupment as an Aid in Financing Nineteenth-Century
Street Improvements in London, " Review of Economic Studies,
Vol. 21, No. 1, 1953, pp. 53-62.
Yearwood, R. M. , "Land Subdivision and Development: American Atti-
tudes, " American Journal of Economics and Sociology. Vol. 29,
No. 2, April, 1970, pp. 113-126.
Yearwood, R. M., "Performance Bonding for Subdivision Improvements, '
Journal of Urban Law, Vol. 46, No. 1, Fall, 1968, pp. 67-85.
Yearwood, R, M. , "Subdivision Law: Timing and Location Control, "
Journal of Urban Law. Vol. 44, No. 4, Summer, 1967, pp. 585-
609.
6.68
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6.3.8 Urban Redevelopment and Renewal
Alonso, W. , "T"he Historical and the Structural Theories of Urban
Form: Their Implications for Urban Renewal, " Land Economics,
Vol. 40, May, 1964, pp. 227-231.
Bloom, M. R. , "Fiscal Productivity and the Pure Theory of Urban
Renewal. " Land Economics, Vol. 38, May, 1962, pp. 134-144.
Bogart, R. G. , "Who Quits When Urban Renewal Hits?" Growth and
Change. Vol. 2, No. 4, October, 1971, pp. 3-8.
Bourne, L. S. , "Location Factors in the Redevelopment Process: A
Model of Residential Change, " Land Economics, Vol. 45, No. 2,
May, 1969, pp. 183-193.
Brownfield, L. , "The Disposition Problem in Urban Renewal, " Law
and Contemporary Problems, Vol. 25, Autumn, I960, pp. 732-
776.
Childs, G. , "Efficient Reallocation of Land in Urban Renewal, "
Western Economic Journal, Vol. 7, No. 3, September, 1969,
pp. 211-223.
Cord, S. , "Role of the Graded Tax in Urban Redevelopment, " American
Journal of Economics and Sociology, Vol. 29, No. 3, July, 1970,
pp. 321-328.
Cord, S. , "Tax Reform and Urban Renewal, " American Journal of
Economics and Sociology, Vol. 30, No. 4, October, 1971,
pp. 395-396.
Curry, Clarence F. , and Dennis H. Gensch, "Feasibility of Rent and
Tax Incentive for Renovation in Older Urban Neighborhoods, "
Working Paper 94-72-3, Graduate School of Industrial Adminis-
tration, Carnegie-Mellon University.
Davis, O. A. , and A. B. Whinston, "Economics of Urban Renewal, "
Law and Contemporary Problems, Vol. 26, Winter, 1961,
pp. 105-116.
6.69
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Davis, O. A. , "A Pure Theory of Urban Renewal, " Land Economics,
Vol. 36, May, I960, pp. 220-226.
Davis, O. A. , "Urban Renewal: A Reply to Two Critics, " Land Eco-
nomics, Vol. 39, February, 1963, pp. 103-108.
Duggar, G. S. , "The Relation of Local Government Structure to Urban
Renewal, " Law and Contemporary Problems, Vol. 26, Winter,
1961, pp. 49-69.
Edel, Matthew, "Urban Renewal and Land Use Conflicts, " Review of
Radical Political Economics, Vol. 3, No. 3, Summer, 1971,
pp. 76-89.
Fisher, R. M. , "Public Costs of Urban Renewal, " Journal of Finance,
Vol. 17, May, 1962, pp. 379-386.
Grebler, L. , "Land Reform in Urban Renewal Programs: A Compara-
tive Analysis, " Western Economic Journal, Vol. 1, No. 2, 1963,
pp. 93-102.
Healy, F. X. > Jr. , "A Method of Analysis for Municipal Investment in
Urban Renewal, " Land Economics. Vol. 39, August, 1963,
pp. 313-319.
Lichfield, N. , "A Pure Theory of Urban Renewal: A Further Comment, !l
Land Economics, Vol. 39, February, 1963, pp. 99-103.
Nourse, H. O. , "The Economics of Urban Renewal, " Land Economics,
Vol. 42, February, 1966, pp. 65-74.
Penny, P. , "Town Planning, Urban Renewal, and Economics, " South
African Journal of Economics, Vol. 36, No. 2, June, 1968,
pp. 156-170.
Robbins, I. S. , "The Planning Process in Urban Development and
Redevelopment, " Land Economics, Vol. 28, February, 1952,
pp. 72-75.
Schaaf, A. H. , "Public Policies in Urban Renewal: An Economic
Analysis of Justifications and Effects, " Land Economics,
Vol. 40, February, 1964, pp. 67-78.
6.70
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Schussheim, M. J. , "Determining Priorities in Urban Renewal, "
Regional Science Association, Papers and Proceedings. Vol. 6,
I960, pp. 195-Z05.
Schussheim, M. J. , "'A Pure Theory of Urban Renewal:' A Comment, "
Land Economics, Vol. 36, November, I960, pp. 395-396.
Segall, J. , "The Propagation of Bulldozers, " Journal of Business,
Vol. 38, October, 1965, pp. 397-402.
Slayton, W. L. , "State and Local Incentives and Techniques for Urban
Renewal, " Law and Contemporary Problems, Vol. 25, Autumn,
I960, pp. 793-812.
Stanfield, J. R. , and W. E. Mullenclore, "A Suggested Form of Bene-
fit-Cost Analysis for an Evaluation of Urban Renewal Projects, "
Land Economics. Vol. 49, No. 1, February, 1973, pp. 81-86.
Vitullo-Martin, J. , "Liberals and the Myths of Urban Renewal, " Public
Policy, Vol. 19, No. 2, Spring, 1971, pp. 355-372.
Walker, M. L. , "Property Tax Expedients in Urban P.enewal, " in
National Tax Association Proceedings of the Fifty-Fourth Annual
Conference, 1961, Harrisburg, Pennsylvania, National Tax
Association, 1962, pp. 44-51.
Weaver, R. C. , "Current Trends in Urban Renewal, " Land Economics,
Vol. 39, November, 1963, pp. 325-341.
Weicher, J. C. , "The Effect of Urban Renewal on Municipal Service
Expenditures, " Journal of Political Economy, Vol. 80, No. 1,
January-February, 1972, pp. 86-101.
Weimer, A. M. , "Incentives to Urban Development and Renewal, " in
Savings and Residential Financing, Conference of the U. S. Savings
and Loan League, 1962, Chicago, Illinois, U. S. Savings and
Loan League, 1962.
Williams, J. A. , Jr. , "The Effects of Urban Renewal Upon a Black
Community: Evaluation and Recommendations, " Social Science
Quarterly, Vol. 50, No. 3, December, 1969, pp. 703-712.
6.71
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Wilson, James Q. (ed. ), Urban Renewal: The Record and the_Contro-
versy, Cambridge, Massachusetts, The MIT'Press, 1966.
Wingo, L. , Jr. , "Urban Renewal: Objectives, Analysis, and Informa-
tion [With Comment by J. W. Dykeman], " in Werner Z. Hirsch
(ed. ), Regional Accounts for Policy Decisions. Papers presented
at the Third Conference on Regional Accounts, Miami Beach,
Florida, 1964, Baltimore, Maryland, Johns Hopkins Press,
1966, pp. 1-29-
Winnick, L. , "Economic Questions in Urban Redevelopment, " American
Economic Association, Papers'and Proceedings, Vol. 51, May,
1961, pp. 290-298.
Wood, D. F. , "Renewing Urban Waterfronts, " Land Economics,
Vol. 41, May, 1965, pp. 141-149.
Yandle, B. J. , "Urban Renewal: The Recondition for Take-Off, " Land
Economics, Vol. 46, No. 4, November, 1970, pp. 484-486.
6.72
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6.3.9 Economics of Regulation
Averch, H. , and L. L. Johnson, "Behavior of the Finn Under Regula-
tory Constraint, " American Economic Review, Vol. 52,
December, 1962, pp. 1052-1069.
Baumol, W. J. , and A. G. Walton, "Full Costing, Competition, and
Regulatory Practice, " Yale Law Journal. Vol.. 82, No. 4,
March, 1973, pp. 639-655.
Chase, S. B. , "Financial Structure and Regulation: Some Knotty
Problems, " Journal of Finance, Vol. 26, No. 2, May, 1971,
pp. 686-697.
Coase, R. H. , "The Regulated Industries: Discussion, " American
Economic Association, Papers and Proceedings, Vol. 54, May,
1964, pp. 194-197.
Cramton, R. C. , "The Effectiveness of Economic Regulation: A Legal
View, " American Economic Association, Papers and Proceedings,
Vol. 54, May, 1964, pp. 182-191.
Eckert, R. D. , "On the Incentives of Regulators: The Case of Taxi-
cabs, " PubJic_Cholce., Vol. 14, Spring, 1973, pp. 83-99.
Farris, M. T. , "Transportation and the Public Utilities, Transporta-
tion Regulation and Economic Efficiency, " American Economic
Review, Vol. 59, No. 2, May, 1969, pp. 244-250.
Freeh, H. E. , "Institutions for Allocating the Radio-TV Spectrum and
the Vested Interests," Journal of Economic Issues, Vol. 4,
No. 4, December, 1970, pp. 23-37.
Freeh, H. E. , "More on Efficiency in the Allocation of Radio-TV
Spectrum, " Journal of Economic Issues, Vol. 5, No. 3,
September, 1971, pp. 100-104.
Frenkel, J. A., and B. P. Pashigian, "Regulation and Excess Demand:
A General Equilibrium Approach, " Journal of Business, Vol. 45,
No. 3, July, 1972, pp. 379-384.
6.73
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Freund, James L. , and Richard W. Epps, "Railroads, Regulation,
and Public Policy, " Federal Reserve Bank of Philadelphia
Business Review, July, 1971, pp. 3-9.
Harbeson, R. W. , "Some Public Policy Issues in Regulated Industries:
Commentary, " Land Economics, Vol. 41, May, 1965, pp. 159-
160.
Harper, D. V. , "Transportation and the Public Utilities: Discussion, "
American Economic Review, Vol. 59, No. 2, May, 1969, pp. 271-
273.
Hazard, J. L. , "Transportation and the Public Utilities: Discussion, "
American Economic Review, Vol. 59, No. 2, May, 1969, pp. 271-
273.
Hilton, G. W. , "The Basic Behavior of Regxilatory Commissions, "
American. Economic Review, Vol. 62, No. 2, May, 1972, pp. 47-
54.
Jackson, R. , "Regulation and Electric Utility Rate Levels, " Land Eco-
nomics. Vol. 45, No. 3, August, 1969, pp. 372-376.
Jordan, W. A. , "Producer Protection, Prior Market Structure, and
the Effects of Government Regulation, " Journal of Law and Eco-
nomics. Vol. 15, No. 1, April, 1972, pp. 151-176.
Keshava, G. P. , "Price Fixation of Insecticides in the Public Sector:
A Study of Decision-Making, " Economic Affairs, Vol. 16, No. 5,
May, 1971, pp. 207-218.
Keyes, L. S. , "Welfare Economics and the Theory of Regulation, "
Land Economics, Vol. 36, November, I960, pp. 349-361.
Kitch, E. W. , "Regulation of the Field Market for Natural Gas by the
Federal Power Commission, " Journal of Law and Economics,
Vol. 11, October, 1968, pp. 433-502.
McNichol, D. L. , "The Comparative Statics Properties of the Theory
of the Regulated Finn, " Bell Journal of Economics and Manage-
ment Science, Vol. 4, No. 2, Autumn, 1973, pp. 428-453.
6.74
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Moore, T. G. , "The Effectiveness of Regulation of Electric Utility
Prices, " Southern Economic Journal, Vol. 36, No. 4, April,
1970, pp. 365-375.
Morton, W. A. , "Creative Regulation, " Land Economics, Vol. 39,
November, 1963, pp. 367-374.
Nicholls, W. H. , "Federal Regulatory Agencies and the Courts, "
American Economic Review, Vol. 34, March, 1944, pp. 56-75.
Noll, R. G. , and L, A. Rivlin, "Regulating Prices in Competitive
Markets, " Yale Law Journal, Vol. 82, No. 7, June, 1973,
pp. 1426-1434.
Rose, J. R. , "Regulation of Intermodal Rate Competition in Transpor-
tation, " 1^4i^M£^n_J.;aw_Revlewi Vol. 69, No. 6, May, 1971,
pp. 1011-1032.
Rose, L. A. , "A Comment on Efficiency in the Allocation of the Radio-
TV Spectrurn, " JourjiaJ._of_J2££n_pjTii^_J^£ue_s_, Vol. 5, No. 3,
September, 1971, pp. 97-100.
Sampson, R. J. , "Inherent Advantages Under Regulation, " American
Economic Review, Vol. 62, No. 2, May, 1972, pp. 55-6].
Scott, D. E. , "Takings and the Public Interest in Railroad Reorgani-
zation, " YaleJLajwJ^urjial, Vol. 82, No. 5, April, 1973,
pp. 1004-1022.
Somers, A. R. , "Regulation of Hospitals, " Annals of the Amcricaji
Academy of Political and Social Science, Vol. 400, March, 1972,
pp. 69-81.
Spivak, J. M. , "Regulation of Medical Devices, " Annals of the
ican Academy of Political and Social Science, Vol. 400, March,
1972, pp. 82-94.
Stein, J. L. , and G. H. Borts, "Behavior of the Firm Under Regula-
tory Constraint, " American Economic Review, Vol. 62, No. 5,
December, 1972, pp. 964-970.
6.75
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Stev/art, R. E. , "Insurance Regulation: Current Issues and Problems,"
Annals of the American Academy of Political and Social Science,
Vol. 400, March, 1972, pp. 59-68.
Stigler, G. J. , "The Process of Economic Regulation, " Antitrust
Bulletin, Vol. 17, No. 1, Spring, 1972, pp. 207-235.
Stigler, G. J. , and C. Friedland, "What Can Regulators Regulate ?
The Case of Electricity, " Journal of Law and Economics, Vol. 5,
October, 1962, pp. 1-16.
Swidler, J. C. , "The Challenge of State Regulation Agencies: The
Experience of New York State, " Annals of the American Academy
of Political and Social Science, Vol. 410, November, 1973,
pp. 106-119.
Syron, R. F., "Administered Prices and the Market Reaction: The
Case of Urban Core Property Insurance, " Journal of Finance,
Vol. 28, No. 1, March, 1973, pp. 147-156.
Takayama, A. , "Behavior of the Firm Under Regulatory Constraint, "
American Economic Review, Vol. 59, No. 3, June, 1969-
Ulvcling, E. F. , "Regulated Firms and Optimal Resource Allocation, "
Rivista Internationale di Scienze Economiche e Commercial!,
Vol. 19, No. 3, March, 1972, pp. 290-296.
Van Cise, J. G. , "Regulation: By Business or Government," Harvard
Business Review, Vol. 44, No. 2, March-April, 1966, pp. 53-63.
Williams, E. W. , Jr., "The Regulated Industries: Discussion,"
American Economic Association, Papers and Proceedings,
Vol. 54, May, 1964, pp. 192-194.
Winter, R. K. , Jr., "Economic Regulation vs. Competition: Ralph
Nader and Creeping Capitalism, " Yale Law Journal, Vol. 82,
No. 5, April, 1973, pp. 890-902.
6.76
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6.3.10 Pricing and Resource Allocation Policies
Abouchar, A._, "The Theory of Optimal Multi-Product Output and
Pricing Under Joint Costs and Variable Technology, " Journal of
Political Economy, Vol. 78, No. 4-1, August, 1970, pp. 729-744.
Acharya, S. N. , "Public Enterprise Pricing and Social Benefit-Cost
Analysis, " Oxford Economic Papers, Vol. 24, No. 1, March,
1972, pp. 36-53.
Ansari, N. , "The Marginal Cost Pricing Theory and Irrigation, "
Oxford Economic Papers, Vol. 18, November, 1966, pp. 344-351.
Bailey, E. E. , "Peak-Load Pricing Under Regulatory Constraint, "
Journal of Political Economy, Vol. 80, No. 4, July-August,
1972, pp. 662-679.
Baumol, W. J. , and D. F. Bradford, "Optimal Departures from Mar-
ginal Cost Pricing, " American Economic Review, Vol. 60,
No. 3, June, 1970, pp. 265-283.
Baumol, W. J. , and W. E. Gates, "The Use of Standards and Prices
for Protection of the Environment, " Swedish Journal of Economics,
Vol. 73, No. 1, March, 1971, pp. 42-54.
Bergson, A. , "Optimal Pricing for Public Enterprise, " Quarterly
Journal of Economics, Vol. 86, No. 4, November, 1972,
pp. 519-544.
Bhalla, G. S. , "Economic Theory and Public Enterprise Pricing, "
Indian Economic Journal, Vol. 12, October-December, 1964,
pp. 156-166.
Bliss, C. J. , "Prices, Markets and Planning, " Economic Journal,
Vol. 82, No, 325, March, 1972, pp. 87-100.
Bohm, P., "Pollution: Taxation or Purification?" Kyklos, Vol. 25,
No. 3, 1972, pp. 501-517.
Boiteux, M. , "On the Management of Public Monopolies Subject to
Budgetary Constraints, " Journal of Economic Theory, Vol. 3,
No. 3, September, 1971, pp. 219-240.
6.77
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Boiteux, M. , "Peak-Load Pricing [Translated by H. W. Izzard], "
Journal of Business. Vol. 33, April, I960, pp. 157-179.
Boyd, J. Hayden, "Pollution Charges Income and the Costs of Water
Quality Management, " Water Resources Research, Vol. 7,
No. 4, August, 1971, pp. 759-769.
Bradford, D. F. , and W. J. Baumol, "Optimal Taxes and Pricing:
Reply, " American Economic Review, Vol. 6?, No. 1, March,
1972, pp. 175-1.76.
Brewer, M. F. , "Public Pricing o/ Natural Resources, " Journal of
Farm Economics, Vol. 44, February, 1962, pp. 35-49.
Buchanan, J. M. , "Peak Loads and Efficient Pricing: Comment
[Followed by A. Gabor's Further Comment], " Quarterly Journal
of Economics. Vol. 80, August, 1966, pp. 463-480.
Buchanan, J. M. , "A Public Choice Approach to Public Utility Pricing,
Public Choice. Vol. 5, Fall, 1968, pp. 1-17.
Burhenne, W. E. , and W. A. Irwin, "Some Suggested Principles for
Environmental Policy, " Natural Resources Journal, Vol. 11,
No. 3, July, 1971, pp. 455-466.
Byrne, R. F., and M. H. Spiro, "On Taxation as a Pollution Control
Policy," Swedish Journal of Economics, Vol. 75, No. 1, March,
1973, pp. 105-109.
Carlin, A., and R. E. Park, "Marginal Cost Pricing of Airport Run-
way Capacity, " American Economic Review, Vol. 60, No. 3,
June, 1970, pp. 310-319.
Coyle, J. J. , "A Reconsideration of Value of Service Pricing, " Land
Economics. Vol. 41, May, 1965, pp. 193-199.
Crew, M. , and G. Roberts, "Some Problems of Pricing Under Sto-
chastic Supply Conditions: The Case for Seasonal Pricing for
Water Supply, " Water Resources Research. Vol. 6, No. 5,
October, 1970, pp. 1272-1276.
Cross, J. G. , "Incentive Pricing and Utility Regulation," Quarterly
Journal of Economics. Vol. 84, No. 2, May, 1970, pp. 236-253.
b. 78
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Cross, J. G. , "Incentive Pricing and Utility Regulation: Reply,"
Quarterly Journal of Economics, Vol. 86, No. 1, February,
1972, pp. 145-147.
Dafermos, Stella, and F. T. Sparrow, "Optimal Resource Allocation
and Toll Patterns, " Journal of Transport PJconomic.s and Policy,
Vol. 5, No. 2, May, 1971, pp. 184-200.
De Salvia, D. N., "An Application of Peak-Load Pricing, " Journal of
Business, University of Chicago, Vol. 42, No. 4, October, 1969,
pp. 458-476.
Dixit, A. K. , "On the Optimum Structure of Commodity Taxes, "
American Economic Review, Vol. 60, No. 3, June, 1970,
pp. 295-301.
Dorcey, A. H. , "Effluent Charges, Information Generation, and Bar-
gaining Behavior. " Natural Resources Journal, Vol. 13, No. 1,
January, 1973, pp. 118-133.
Edelson, Noel M. , "Congestion Tolls Under Monopoly, " American
Economic. Review. Vol. 6l, No. 5, December, 197]. pp. 873-
882.
Fan, L. , "Tariffs on Takeoffs and Landings: An Analysis of Airport
Congestions, " Economic and Business Bulletin, Vol. 23, No. 2,
Winter, 1971, pp. 29-31.
Ferguson, D. C., "Joint Products and Road Transport Rates in Trans-
port Models, " Journal of Transport Economics and Policy,
Vol. 6, No. 1, January, 1972, pp. 69-76.
Ferrar, T. A. , and A. Whinston, "Taxation and Water Pollution Con-
trol, " Na^u^JJRc^m^^_J^uj^ial, Vol. 12, No. 3, July, 1972,
pp. 307-317.
Fristoe, C. W. , N. G. Keig, and F. O. Goddard, "Some Aspects of
Water Pricing in Non-Industrial Communities, " Land Economics,
Vol. 47, No. 1, February, 1971, pp. 87-92.
Gerhardt, P. H. , "Incentives to Air Pollution Control, " Law and Con-
temporary Problems, Vol. 33, No. 2, Spring, 1968, pp. 358-
368.
6.79
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Giglio, R. J. , and R. Wrightington, "Methods for Apportioning Costs
Among Participants in Regional Systems, " Water Resources
Research. Vol. 8, No. 5, October, 1972, pp. 1133-1144.
Greene, R. L. , "Peak Load Pricing: An Application, " Quarterly
Review of Economics and Business, Vol. 13, No. 3, Autumn,
1973, pp. 105-114.
Guise, J. W. B. , and J. C. Flinn, "The Allocation and Pricing of
Water in a River Basin, " American Journal of Agricultural Eco-
nomics, Vol. 52, No. 3, August, 1970, pp. 411-421.
Gysi, M. , and D. P. Loucks, "Some Long Run Effects of Water -
Pricing Policies, " Water Resources Research, Vol. 7, No. 6,
December, 1971, pp. 1371-1382.
Haimes, Y. Y. , M. A. Kaplan, and M. A. Husar, "A Multilevel
Approach to Determining Optimal Taxation for the Abatement
of Water Pollution, " Water Resources Research, Vol. 8, No. 4,
August, 1972, pp. 851-860.
Hall, W. A. , "A Method for Allocating Costs of a Water Supply Canal, "
Journal of Farm Economics, Vol. 45, November, 1963, pp. 713-
720.
Hanke, S. H. , and R. K. Davis, "Potential for Marginal Cost Pricing
in Water Resource Management, " Water Resources Research,
Vol. 9, No. 4, August, 1973, pp. 808-825.
Hass, J. E. , "Optimal Taxing for the Abatement of Water Pollution, "
Water Resources Research, Vol. 6, No. 2, April, 1970, pp. 353-
365.
Henderson, J. V. , "Road Congestion: A Reconsideration of Pricing
Theory," Journal of Urban Economics, Vol. 1, No. 3, July,
1974, pp. 346-365.
Hewitt, J. , "The Calculation of Congestion Taxes on Roads, " Economica,
N.S., Vol. 31, February, 1964, pp. 72-81.
Jackson, R. , "Airport Noise and Congestion: A Peak Load Pricing
Solution, " Applied Economics, Vol. 3, No. 3, September, 1971,
pp. 197-203.
6.80
-------
Jackson, R. , "Corrective Taxes and Pollution Control, " Nebraska
Journal of Economics and Business, Vol. 11, No. 1, Winter,
1972, pp. 3-10.
Jaffee, B. L. , "Incentive Pricing and Utility Regulation: Comment, "
Quarterly Journal of Economics, Vol. 86, No. 1, February,
1972, pp. 143-144.
Johannesson, M. , "Dynamic Aspects of the Use of Prices for Protect-
ing the Environment, " Swedish Journal of Economics, Vol. 74,
No. 2, June, 1972, pp. 286-291.
Johnson, J. A. , "The Distribution of the Burden of Sewer User
Charges Under Various Charge Formulas, " National Tax Journal,
Vol. 22, No. 4, December, 1969, pp. 472-485.
Johnson, J. A. , "Economic Analysis of Sewer Service Charge Form-
ulas, " Land Economics, Vol. 47, No. 1, February, 1971,
pp. 80-86.
Johnson, M. B. , "On the Economics of Road Congestion, " Economet-
rica. Vol. 32, January-April, 1964, pp. 137-150.
Landstrom, K. S. , "Comment on 'Public Pricing of Natural Resources'
[Followed by M. F. Brewer's Reply], " Journal of Farm Eco-
nomics, Vol. 44, November, 1962, pp. 1092-1097.
Lave, L. B. , and J. S. DeSalvo, "Congestion, Tolls, and the Eco-
nomic Capacity of a Waterway, " Journal of Political Economy,
Vol. 76, No. 3, May/June, 1968, pp. 375-391.
LeBeau, C. P., "Tax Incentives to Combat Pollution, " Journal of
Urban Law. Vol. 50, No. 2, November, 1972, pp. 273-290.
Lerner, A. P. , "Pollution Abatement Subsidies, " American Economic
Review, Vol. 62, No. 5, December, 1972, pp. 1009-1010.
Levine, M. E. , "Landing Fees and the Airport Congestion Problem, "
Journal of Law and Economics, Vol. 12, No. 1, April, 1969,
pp. 79-108.
6.81
-------
Levy-Lambert, H. , "On Pricing of Services of Variable Character-
istics: Application to Road User Taxation, " Econometrica,
Vol. 36, No. 3-4, July-October, 1968, pp. 564-574.
Little, J. M. , and K. M. McLeod, "The New Pricing Policy of the
British Airports Authority, " journal of Transport Economics
and Policy, Vol. 6, No. 2, May, 1972, pp. 101-115.
Littlechild, S. C. , "A Game-Theoretic Approach to Public Utility
Pricing, " Western Economic Journal, Vol. 8, No. 2, June,
1970, pp. 162-166.
Littlechild, S. C. , "Myopic Investment Rules and Toll Charges in a
Transport Network, " Journal of Transport Economics and Policy,
Vol. 7, No. 2, May, 1973, pp. 194-204.
Mar, 3. W. , "A System of Waste Discharge Rights for the Manage-
ment of Water Quality, " Water RH sour cesJR.es earch, Vol. 7,
No. 5, October, 1971, pp. 1079-1086.
Marchand, M. , "A Note on Optimal Tolls in an Imperfect Environment, "
Econornetric_a, Vol. 36, No. 3-4, July-October, 1968, pp. 575-
581.
McFarland, W. E. , "Strategies in Water Quality Control, " Natural
Resources Journal. Vol. 12, No. 3, July, 1972, pp. 318-329.
McLarty, R. A., "Highway User Charges: Another Comment, "
Canadian Journal of Economics, Vol. 4, No. 4, November, 1971,
pp. 577-578.
Mestelman, S. , "Highway User Fees and Vehicle Transport Modes:
An Old Rule Defended, " Journal of Political Economy, Vol. 81,
No. 3, May-June, 1973, pp. 786-795.
Miller, J. C. , III, "The Optimal Pricing of Freight in Combination
Aircraft, " Journal of Transport Economics and Policy. Vol. 7,
No. 3, September, 1973, pp. 258-268.
Minasian, J. R. , "Ambiguities in Theory of Peak-Load Pricing and
Application of Theory of Queues, " Land Economics. Vol. 42,
August, 1966, pp. 355-362.
6.82
-------
Mohring, H. , "The Peak Load Problem with Increasing Returns and
Pricing Constraints, " American Economic Review, Vol. 60,
No. 4, September, 1970, pp. 693-705.
Montgomery, W. D. , "Markets in Licenses and Efficient Pollution
Control Programs, " Journal of Economic Theory, Vol. 5, No. 3,
December, 197Z, pp. 395-418.
Nelson, J. C. , "The Pricing of Highway, Waterway, and Airway Facil-
ities, " American Economic Association, Papers and Proceedings,
Vol. 52, May, 1962, pp. 426-435.
Neutze, G. M. , "Investment Criteria and Road Pricing, " Manchester
School of Economics and Social Studies. Vol. 34, January, 1966,
pp. 63-73.
Neutze, G. M. , "Pricing Road Use, " Economic Record, Vol. 40, June,
1964, pp. 175-186.
Page, T., "Failure of Bribes and Standards for Pollxition Abatement, "
Natural Resources Journal, Vol. 13, No. 4, October, 1973,
pp. 677-704.
Park, R. E. , "Congestion Tolls for Commercial Airports, " Econo-
metrica, Vol. 39, No. 5, September, 1971, pp. 683-694.
Paul, M. E. , "The Economics of Roads: Covering Costs by Receipts, "
Oxford University, Institute of Economics and Statistics, Bulletin,
Vol. 22, November, I960, pp. 299-311.
Pavliuchenko, V. , "Some Problems in the Long-Term Planning of Pur-
chases of Licenses, " Problems of Economics, Vol. 15, No. 11,
March, 1973, pp. 92-98.
Peltzman, Sam, "Pricing in Public and Private Enterprises: Electric
Utilities in the United States, " Journal of Law and Economics,
Vol. 14, No. 1, April, 1971, pp. 109-147.
Ramanadham, V. V. , "Tax and Subsidy Elements in Public Enterprise
Prices, " Review of Economics and Statistics, Vol. 46, November,
1964, pp. 392-397.
6.K3
-------
Reza, A. M. , "Lerner on Pollution Controls: Comment, " American
Economic Review, Vol. 62, No. 5, December, 1972, pp. 1007-
1008.
Riordan, Courtney, "Multistage Marginal Cost Model of Investment-
Pricing Decisions: Application to Urban Water Supply Treatment
Facilities, " Water Resources Research, Vol. 7, No. 3, June,
1971, pp. 463-478.
Rose, M. , "Market Problems in the Distribution of Emission Rights, "
Water Resources Research, Vol. 9, No. 5, October, 1973,
pp. 1132-1144.
Rose-Ackerman, S. , "Effluent Charges: A Critique, " Canadian Journal
of Economics, Vol. 6, No. 4, November, 1973, pp. 512-528.
Roth, G. J., "The Equilibrium of Traffic on Congested Streets: An
Economic Approach, " International Statistical Institute Review.
Vol. 31, No. 3, 1963, pp. 386-396.
Rothenberg, J. , "The Economics of Congestion and Pollution: An Inte-
grated View," American Economic Review, Vol. 60; No. 2. May,
1970, pp. 114-121.
Ruff, L. E. , "A Note on Pollution Prices in a General Equilibrium
Model, " American Economic Review, Vol. 62, No. 1, March,
1972, pp. 186-192.
Schmid, A. A. , "Water Allocation by Perinit in Wisconsin, " Land
Economics. Vol. 37, May, 1961, pp. 182-187.
Sherman, R. , "Congestion Interdependence and Urban Transit Fares, "
Econometrica, Vol. 39, No. 3, May, 1971, pp. 565-576.
Sherman, R. , "Subsidies to Relieve Urban Traffic Congestion, " Journal
of Transport Economics and Policy, Vol. 6, No. 1, January, 1972,
pp. 22-31.
Sinha, R. K. , "Public Enterprises and the Theory of Marginal Cost
Pricing. " Economic Affairs. Vol. 15, Nos. 6-8, August, 1970,
pp. 321-328.
6.84
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Solow, R. M. , "Congestion Cost and the Use of Land for Streets, "
Bell Journal of Economics and Management Science, Vol. 4,
No. 2, Autumn, 1973, pp. 602-618.
Solow, R. M. , "Congestion, Density, and the Use of Land in Transpor-
tation," " Sjwe^j^Ljl£]i£I13i_2l_^c^namj^_s^, Vol. 74, No. 1, March,
1972, pp. 161-173.
Sovle, D. M., "Ability-to-Pay Taxation as Discriminatory Pricing of
Government Services, " Land Economics, Vol. 43, May, 1967,
pp. 219-222.
Thomson, 3. M. , "Some Aspects of Evaluating Road Improvements in
Congested Areas, " Economctrica, Vol. 38, No. 2, March, 1970,
pp. 298-310.
Tietenberg, T. H. , "Controlling Pollution by Price and Standard Sys-
tems: A General Equilibrium Analysis, " Swedish Journal of
Economics, Vol. 75, No. 2, June, 1973, pp. 193-203.
Tietenberg, T. H. , "Specific Taxes and the Control of Pollution: A
General Equilibrium Analysis, " Quarterly Journal of Economics,
Vol. 87, No. 4, November, 1973, pp. 503-522.
Vandermeulen, A. J. , "Five Canons for Setting State Fees, " Western
Economic Journal, Vol. 4, No. 3, 1966, pp. 216-220.
Vickrey, W. S. , "Transportation and the Public Utilities, Congestion
Theory and Transport Investment, " AmejMc.anJgconomic Review.
Vol. 59, No. 2, May, 1969, pp. 251-260.
Walters.. A. A. , "The Cost of Using Roads, " Finance and Development.
Vol. 6, No. 1, March, 1969, pp. 51-56.
Walters, A. A., "Road Pricing. " De Economist. Vol. 116, No. 5,
September/October, 1968, pp. 545-560.
Walters, A. A. , "Road Pricing: Some Technical Aspects, " De Econ-
omist. Vol. 116, No. 6, November/December, 1968, pp. 716-
728.
6.85
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Weiner, N. S., "Multiple Incentive Fee Maximization: An Economic
Model, " Quarterly Journal of Economics, Vol. 77, November,
1963, pp. 603-616.
Wenders, John T. , "Corrective Taxes and Pollution Abatement, " The
Journal of Law and Economics, Vol. XVI, October, 1973,
pp. 365-368.
Wenders, J. T. , "Pollution Control: Uses of Corrective Taxes Recon-
sidered, " Natural Resources Jo\irnal, Vol. 12, No. 1, January,
1972, pp. 76-82.
Wenders, J. T. , "Profit Maximization, Pollution Abatement, and Cor-
rective Pollution Taxes, " Joxirnal of Economic Issues, Vol. 6,
No. 2 and 3, September, 1972, pp. 137-140.
Westfield, F. M. , "Practicing Marginal Cost Pricing: A Review, "
Journal of Business, Vol. 39, January, 1966, pp. 67-73.
Williamson, O. E. , "Peak-Load Pricing and Optimal Capacity Under
Indivisibility Constraints, " American Economic Review, Vol. 56,
September, 1966, pp. 810-827.
(S.ftfS
-------
6.3.11 Social Choice
Alessio, F. J. , "Environmental Quality Control: Social Rules and Eco-
nomic Problems, " Review of Social Economy, Vol. 30, No. 3,
September, 1972, pp. 340-351.
Arrow, K. , Social Choice and Individual Values, New York, New York,
John Wiley, 1951.
Auster, R. , and M. Silver, "Collective Goods and Collective Decision
Mechanisms, " Public Choice, Vol. 14, Spring, 1973, pp. 1-17.
Baum, D. J. , "The Consumer and the Federal Trade Commission, "
Journal of Urban Law, Vol. 44, No. 1, Fall, 1966, pp. 71-88.
Baxter, William F. , and Lillian R. Altree, "Legal Aspects of Airport
Noise, " The Journal of Law and Economics, Vol. XV, April,
1972, pp. 1-114.
Becker, G. S. , "Competition and Democracy, " Journal of Law and
Economics, Vol. 1, October, 1958, pp. 105-109.
Bernholz, P. , "Economic Policies in a Democracy, " Kyklos, Vol. 19,
Fasc. 1, 1966, pp. 48-79.
Blase, M. G. , W. Gottman, and C. G. McNabb, "Public Water Supply
Districts: Evaluation of a New Institution, " Land Economics,
Vol. 48, No. 3, August, 1972, pp. 273-276.
Boyer, B. B. , "Alternatives to Administrative Trial-Type Hearings
for Resolving Complex Scientific, Economic, and Social Issues, "
Michigan Law Review, Vol. 71, No. 1, November, 1972,
pp. 111-170.
Brandt, K. , "Voting Problems in Group Decisions, " German Economic
Review. Vol. 7, No. 4, 1969, pp. 273-294.
Broaddus, A. , "Voting and Social Choice: Comment, " American Econ-
omist. Vol. 14, No. 1, Spring, 1970, pp. 45-46.
6.87
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Brown, J, T. , and Duncan, W. L. , "Legal Aspects of a Federal Water
Quality Surveillance System, " Michigan Law Review, Vol. 68,
No. 6, May, 1970, pp. 1131-1166.
Brownlie, 1. , "The Human Environment: Problems of Standard-Setting
and Enforcement, " Natural Resources Journal, Vol. 12, No. 2,
April, 1972, pp. 187-194.
Buchanan, James M. , and Gordon Tullock, The Calculus of Consent,
Ann Arbor, Michigan, University of Michigan Press, 1962.
Buchanan, J. M. , "Fiscal Institutions and Efficiency in Collective Out-
lay, " American Economic Association, Papers and Proceedings,
Vol. 54, May, 1964, pp. 227-235.
Buchanan, J. M. , "Politics, Policy, and the Pigovian Margins, "
Economica, N.S., Vol. 29, February, 1962, pp. 17-28.
Buchanan, J. M. , "Simple Majority Voting, Game Theory, and
Resource Use, " Canadian Journal of Economics and Political
Science, Vol. 27, August, 1961, pp. 337-348.
Buchanan, J. M. , "Social Choice, Democracy, and Free Markets, "
Journal of Political Economy, Vol. 62, April, 1954, pp. 114-123.
Caldwell, L. K. , "Environmental Quality as an Administrative Prob-
lem, " Annals of the American Academy of Political and Social
Science. Vol. 400, March, 1972, pp. 103-115.
Campbell, D. E. , "Social Choice and Intensity of Preference, " Journal
of Political Economy, Vol. 81, No. 1, January-February, 1973,
pp. 211-218.
Campbell, D. , "Voting and Social Choice, " American Economist)
Vol. 14, No. 1, Spring, 1970, pp. 35-44.
Caponera, D. A. , "Towards a New Methodological Approach to Envi-
ronmental Law, " Natural Resources Journal, Vol. 12, No. 2,
April, 1972, pp. 133-152.
Coleman, J. S. , "The Benefits of Coalition," Public Choice, Vol. 8,
Spring, 1970, pp. 45-61.
6.88
-------
Craine, L. E. , "Institutions for Managing Lakes and Bays, " Natura.1
Resources Journal. Vol. 11, No. 3, July, 1971, pp. 519-546.
Cramton, R. C. , and R. K. Berg, "On Leading a Horse to Water:
NEPA and the Federal Bureaucracy, " Michigan Law Review.
Vol. 71, No. 3, January, 1973, pp. 51]-536.
Craven, J. , "Majority Voting and Social Choice, " Review of Economic
Studies. Vol. 38, No. 114, April, 1971, pp. 265-267.
Currie, D. P. , "Motor Vehicle Air Pollxition: State Authority and
Federal Pre-Emption, " Michigan Law Review, Vol. 68, No. 6,
May, 1970, pp. 1083-1102.
Doggett, K. M. , and D. J. Friedman, "Legislation for Clean Ai r: An
Indoor Front, " Yale Law Journal, Vol. 82, No. 5, April, 1973,
pp. 1040-1054.
Downs, Anthony, An Economic Theory of Democi'acy, New York, New
York, Harper and Row Publishers, Inc., 1957.
Downs, A. , "An Economic Theory of Political Action in a Democracy, "
Journal of Political Economy, Vol. 65, April, 1957, pp. 135-150.
Downs, A., "In Defense of Majority Voting [Followed by G. Tullock's
Reply], " Journal of Political Economy, Vol. 69, April, 1961,
pp. 192-203.
Duggal, V. P., "Is There an Unseen Hand in Government? 1! Indian
Economic Journal, Vol. 14, April-June, 1967, pp. 645-650.
Etzioni, A. , The Active Society: A Theory of Societal and Political
Processes, New York, New York, The Free Press.
Ferejohn, J. , and T. Page, "A Note on 'Voting or a Price System in
a Competitive Market Structure, '" American Political Science
Review. Vol. 67, No. 1, March, 1973, pp. 157-160.
Fischel, W. A. , "Aesop's Paradox: The Classical Critique of Demo-
cratic Decision Processes, " Joxirnal of Political Economy,
Vol. 80, No. 1, January-February, 1972, pp. 208-212.
6.89
-------
Fishburn, Peter C. , "The Theory of Representative Majority Decision, "
Econometrica. Vol. 39, No. 2, March, 1971, pp. 273-284.
Fox, I. K. , and L. Wible, "Information Generation and Communication
to Establish Environmental Quality Objectives, " Natural Resources
Journal. Vol. 13, No. 1, January, 1973, pp. 134-149.
Frauenglass, H. , "Environmental Policy, Public Participation, and the
Open Information_System, " Natural Resources Journal. Vol. 11,
No. 3, July, 1971, pp. 489-496.
*
Freeman, A. M. , III, "Advocacy and Resource Allocation Decision in
the Public Sector, " Natural Resources Journal, Vol. 9, No. 2,
April, 1969.
Fre.eman, A. M. , and R. H. Haveman, "Water Pollution Control, River
Basin Authorities, and Economic Incentives: Some Current Policy
Issues, " Public Policy. Vol. 19, No. 1, Winter, 1971, pp. 53-74.
Freeman, H. , "A Means of Stopping Silent Murder, " Journal of Urban
Law, Vol. 48, No. 3, April, 1971, pp. 701-722.
Frey, B. S. , "Why Do High Income People Participate More in Poli-
tics ?" JPuJbli^_Choice, Vol. 11, Fall, 1971, pp. 100-105.
Gellhorn, E. , and P. E. Larsen, "Interlocutory Appeal Procedures in
Administrative Hearings, " Michigan Law Review, Vol. 70, No. 1,
November, 1971, pp. 109-146.
Grad, F. P. , and L. Rockett, "Environmental Litigation - Where The
Action Is?" Natural Resources Journal, Vol. 10, No. 4, October,
1970, pp. 742-762.
Grofman, B. , "Some Notes on Voting Schemes and the Will of the
Majority. " Public Choice, Vol. 7, Fall, 1969, pp. 65-80.
Hadden, D. W. , "The Socio-Economic Aspects of Private Environmental
Litigation, " Journal of Urban Law, Vol. 48, No. 3, April, 1971,
pp. 607-616.
Haefele, E. T. , "A Utility Theory of Representative Government, "
American Economic Review, Vol. 61, No. 3, June, 1971,
pp. 350-367.
6.90
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Hagevik, G. , "Legislating for Air Quality Management: Reducing
Theory to Practice, " Law and Contemporary Problems. Vol. 33,
No. 2, Spring, 1968, pp. 369-398.
Hatry, H. P. , "Reflecting the Consumer Viewpoint in State and Local
Government Fiscal and Expenditure Decisions, " National Tax
Journal. Vol. 25, No. 3, September, 1972, pp. 363-368.
Hazelton, J. E. , "Public Policy for Controlling the Environment, "
Journal of Urban Law. Vol. 48, No. 3, April, 1971, pp. 631-656.
Hetherington, J. A. , "Community Participation: A Critical View, "
Law and Contemporary Problems, Vol. 36, No. 1, Winter, 1971,
pp. 13-34.
Ingram, H. M. , "Information Channels and Environmental Decision
Making, " Natural Resources Journal, Vol. 13, No. ], January,
1973, pp. 150-169.
Jackson, H. M. , "Foreword: Environmental Quality, the Courts and
the Congress, " Michigan Law Review, Vol. 68, No. 6, May,
1970, pp. 1073-J082. '
Johnson, C. C. , Jr. , "Law and Environment, " J£u^^_^f_U_rJ?3_J5Ji£Lw'
Vol. 48, No. 3, April, 1971, pp. 557-562.
Kirgis, F. L. , "Effective Pollution Control in Industrialized Countries:
International Economic Disincentives, Policy Responses, and the
GATT. " Michigan Law Review. Vol. 70, No. 5, April, 1972,
pp. 859-918.
Klevorick, A. K. , and G. H. Kramer, "Social Choice on Pollution
Management: The Genossenschaften, " Journal of Public Eco-
nomics, Vol. 2, No. 2, April, 1973, pp. 101-146.
Knees e, A. V. , "Water Qxiality Management by Regional Authorities in
the Ruhr Area, With Special Emphasis on the Role of Cost Assess-
ment, " Regional Science Association, Papers and Proceedings,
Vol. 11, 1963, pp. 229-250.
Kochansky, R. W. , "The Role of the Environmental Lawyer in Preserv-
ing Our Natural Heritage," Journal of Urban Law, Vol. 48, No. 3,
April, 1971, pp. 725-739.
6.91
-------
Kovel, A., "A Case for Civil Penalties: Air Pollution Control, "
Journal of Urban Law. Vol. 46, No. 2, Winter, 1968, pp. 153-
171.
Krader, L. , "Environmental Threat and Social Organization, " Annals
of the American Academy of Political and Social Science,
Vol. 389, May, 1970, pp. 11-18.
Lekachman, R. , "Law and Economics, " Journal of Economic Issues,
Vol. 4, Nos. 2-3, June-September, 1970, pp. 25-39.
Levi, D. R. , and D. Colyer, "Some Legal and Economic Aspects of
Citizen-Initiated Legal Mechanisms for Solving Environmental
Quality Problems, " Intermountain Economic Review, Vol. 3,
No. 2, Fall, 1972, pp. 36-52.
Maass, A. , and H. B. Zobel, "Anglo-American Water Law: Who
Appropriated the Riparian Doctrine, " Public Policy, Vol. 10,
I960, pp. 109-156.
Margolis, J. , "The Structure of Government and Public Investment, "
American Economic Association, Papers and Proceedings,
Vol. 54, May, 1964, pp. 236-242.
Martin, D. L. , "Legal Constraints and the Choice of Organizational
Form, " American Economic Review, Vol. 63, No. 2, May,
1973, pp. 326-334.
Matthews, V. , and L. Apedaile, "Action Agencies, Advocacy, and
Analysts, " Canadian Journal of Agricultural Economics, Vol. 19,
No. 1, July, 1971, pp. 1-11.
McKean, R. N. , "Government and the Consumer, " Southern Economic
Journal. Vol. 39, No. 4, April, 1973, pp. 481-489.
McKean, R. N. , "The Unseen Hand in Government, " American Eco-
nomic Review, Vol. 55, June, 1965, pp. 496-506.
Meister, R. W. , "Equal Representation and the Weighted Voting Alter-
native, " Yale Law Review, Vol. 79, No. 2, December, 1969,
pp. 307-318.
6.92
-------
Meyerson, M., and E. C. Banfield, Politics, Planning and the Public
Interest, Glencoe, New York, Free Press.
Miclialos, A. C. , "The Costs of Decision-Making, " Public Choice,
Vol. 9, Fall, 1970, pp. 39-51.
Millinnan, J. W. , "Water Law and Private Decision-Making: A Cri-
tique, " Journal of Law and Economics, Vol. 2, October, 1959,
pp. 41-63.
Mislnan, E. J. , "Pareto Optimality and the Law, " Oxford Economic
Papers, New Series, Vol. 19, November, 1967, pp. 255-Z87.
Mueller, D. C. , "Constitutional Democracy and Social Welfare, "
Quarterly Journal of Economics, Vol. 87, No. 1, February,
1973, pp. 60-80.
Negishi, T. , "The Excess of Public Expenditures on Industries, "
Journal of Public Economics, Vol. 2, No. 3, July, 1973,
pp. 231-240.
Norclm, J. A. , "The Normaliz ed Vote Margins Method of Committee
Voting, " Rivista Internationale di Scienze Economiche e Com-
mercial!, Vol. 16, No. 6, June, 1969, pp. 529-549.
O'Connor, J. , "Scientific and Ideological Elements in the Economic
Theory of Government Policy, " Science and Society, Vol. 33,
No. 4, Fall-Winter, 1969, pp. 385-414.
Olson, M. , e_t al_. , "Efficiency in fche Government Sector: Discussion, "
American Economic Association, Papers and Proceedings,
Vol. 54, May, 1964.
Olson, M. , The Logic of Collective Action: Public Goods and the
Theory of Groups, Cambridge, Massachusetts, Harvard Uni-
versity Press.
Oppenheimer, J. C. , and L. A. Miller, "Environmental Problems and
Legislative Responses, " Annals of the American Academy of
Political and Social Science, Vol. 389, May, 1970, pp. 77-86.
6.93
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Philpotts, G., "Vote Trading, Welfare, and Uncertainty," Canadian
Journal of Economics, Vol. 5, No. 3, Augxist, 1972, pp. 358-372.
Rader, T. , "An Economic Approach to Social Choice, " Public Choice,
Vol. 15, Summer, 1973, pp. 49-75.
Roberts, B. , "An Extension of Optimality Criteria: An Axiomatic
Approach to Institutional Choice, " Journal of Political Economy,
Vol. 81, No. 2, Parti, March-April, 1973, pp. 386-400.
Roberts, B. , "Individual Influence Over Group Decisions, " Southern
Economic Journal, Vol. 37, No. 4, April, 1971, pp. 434-444.
Roberts, M. J. , "Organizing Water Pollution Control: The Scope and
Structure of River Basin Authorities, " Public Policy, Vol. 19,
No. 1, Winter, 1971, pp. 75-141.
Rondinelli, D. A. , "Politics of Law Making and Implementation: The
Case of Regional Development Policy, " Journal of Urban Law,
Vol. 50, No. 3, February, 1973, pp. 403-447.
Ross, J. C. , "Environmental Law. Air Quality Litigation in the El
Paso-Juarez Area, " Na^raJ_R^s^^r_ces_Jqurnal, Vol. 12, No. 4,
October, 1972, pp. 551-563.
Sax, Joseph L. , "Emerging Legal Strategies: Judicial Intervention, "
Annals of the American Academy of Political and Social Science,
Vol. 389, May, 1970, pp. 71-76.
Shapiro, D. L. , "Pressure Groups and Public Investment Decisions:
A Note. " Public Choice, Vol. 10, Spring, 1971, pp. 103-108.
Shubik, M. , "On Homo Politicus and the Instant Referendum, " Public
Choice. Vol. 9, Fall, 1970, pp. 79-84..
Shubik, M., "Voting, Or a Price System in a Competitive Market
Structure, " American Political Science Review, Vol. 64, No. 1,
March, 1970, pp. 179-181.
Sive, D. , "Environmental Policy and Law, " Natural Resources Journal,
Vol. 11, No. 3, July, 1971, pp. 467-477.
Smith, S. C. , "Legal and Institutional Controls in [Western] Water
Allocation," Journal of Farm Economics, Vol. 42, December,
I960, pp. 1345-1358.
6.94
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Sterne, R. S., A. Rabushka, and H. A. Scott, "Serving the Elderly? -
An Illustration of the Niskanen Effect, " Public Choice, Vol. 13,
Fall, 1972, pp. 81-90.
Stigler, G. J. , "Economic Competition and Political Competition, "
Public Choice, Vol. 13, Fall, 1972, pp. 91-106.
Stigler, G. J. , "The Optimum Enforcement of Laws, " Journal of Polit-
ical Economy. Vol. 78, No. 3, May-June, 1970, pp. 526-536.
Thompson, A. R. , "Legal Responses to Pollution Problems - Their
Strengths and Weaknesses, " Natural Resources Journal. Vol. 12,
No. 2, April, 1972, pp. 227-241.
Tibbies, L. , "The Ombudsman: Who Needs Him?" Journal of Urban
Law, Vol. 47, No. 1, Fall, 1969, pp. 1-67.
Ticer, W. R. , "Legal Methods of Eliminating Certain Undesirable By
Products of the Air Transportation Industry, " Natural Resources
Journal. Vol. 11, No. 1, January, 1971, pp. 177-194.
Tisdell, C. , "Some Bounds Upon the Pareto Optimality of Group Beha-
vior, " Kyjdos., Vol. 19, Fasc. 1, 1966, pp. 81-104.
Townsend, R. G. , "Classrooms vs. Trees in Public Trust Lands:
Pacpecke vs. Public Building Commission of Chicago, " Journal
of Urban Law, Vol. 50, No. 2, November, 1972, pp. 257-272.
Tullock, Gordon (ed. ), Papers on Non-Market Decision Making,
Charlottesville, Virginia, University of Virginia, 1966.
Tullock, G. , "Problems in the Theory of Public Choice, Social Cost
and Government Action, " American Economic Review, Vol. 59,
No. 2, May, 1969, pp. 189-198.
Tullock, G. , "Problems of Majority Voting, " Journal of Political Eco-
nomy, Vol. 67, December, 1959, pp. 571-579.
Wade, L. L. , and R. L. Curry, "A Economic Model of Socio-Political
Bargaining, " American Journal of Economics and Sociology,
Vol. 30, No. 4, October, 1971, pp. 383-394.
6.95
-------
Wandesforde-Smith, G. , "The Bureaucratic Response to Environmental
Politics. " Natural Resources Journal, Vol. 11, No. 3, July, 1971,
pp. 479-488.
Ward, R. J. , "Welfare Economics, Planning, and the Individual, "
Review of Social Economy, Vol. 12, September, 1954, pp. 122-
134.
Weafcherby, J. L. , T'A Note on Administrative Behavior and Public
Policy. " Public Choice, Vol. 11, Fall, 1971, pp. 106-110.
Wengert, N. , "Political and Social Accommodation: The Political Pro-
cess and Environmental Preservation, " Natural Resources Jour-
nal. Vol. 11, No. 3, July, 1971, pp. 437-446.
Zeckhauser, R. , "Voting Systems, Honest Preferences, and Pareto
Optimality, " American Political Science Review, Vol. 67, No. 3,
September, 1973, pp. 934-946.
6.96
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6.3.12 State and Local Public Expenditures
Aaron, H. J. , "Local Public Expenditures and the 'Migration Effect, "'
.Western Economic Journal, Vol. 7, Mo. 4, December, 1969,
pp. 385-390.
Amdursky, R. S., "Public-Private Partnership for Urban Progress,"
Journal of Urban Law, Vol. 46, No. 2, Winter, 1968, pp. 199-215.
Anderson, R. Dennis, "Toward an Equalization of Municipal Services:
Variations on a Theme by Hawkins. " Journal of Urban Law,
Vol. 50, No, 2, November,- 1972, pp. 177-197.
Aronson, J. R. , and E. Schwartz, "Financing Public Goods and the
Distribution of Population in a System of Local Governments, "
National Tax Journal, Vol. 26, No. 2, June, 1973, pp. 137-160.
Barr, James L. , "City Size, Land Rent, and the Supply of Public
Goods. " Regional and Urban Economics, Vol. 2, No. 1, 1972,
pp. 67-103.
Barr, J. L. , and O. A. Davis, "An Elementary Political and Economic
Theory of the Expenditures of Local Governments, " Southern
Economic Journal, Vol. 33, October, 1966, pp. 149-165.
Barr, James L. , "Tiebout Models of Community Structure, " Papers
of the Regional Science Association. Vol. 30, 1972, pp. 113-139.
Booms, B. H. , and T. Hu, "Toward a Positive Theory of State and
Local Public Expenditures: An Empirical Example, " Public
Finance. Vol. 26, No. 3, 1971, pp. 419-436.
Borcherding, T. E. , and R. T. Deacon, "The Demand for the Services
of Non-Federal Governments, " American Economic Review,
Vol. 62, No. 5, December, 1972, pp. 891-901.
Boskin, M. J. , "Local Government Tax and Product Competition, and
the Optimal Provision of Public Goods, " Journal of Political
Economy, Vol. 81, No. 1, January-February, 1973, pp. 203-
210.
6.97
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Boyle, L. , "Problems of Expenditure Control in Local Government, "
Scottish Journal of Political Economy, Vol. 10, February, 1963,
pp. 102-110.
Breton, A. , "Scale Effects in Local and Metropolitan Government
Expenditures, " Land Economics, Vol. 41, November, 1965,
pp. 370-372.
Crihfield, B. , and G. A. Bell, "Budgeting for State and Local Govern-
ment Services, " Annals of the American Academy of Political
and Social Science, Vol. 379, September, 1968, pp. 31-38.
Criteria for Evaluation in Planning State and Local Prog rains, Study,
1967, for Subcommittee on Intergovernmental Relations, Senate
Committee on Government Operations, U. S. 90th Congress,
1st Session, Washington, U. S. Government Printing Office, 1967.
Davis, O. A. , and G. H. Haine.s, Jr. , "A Political Approach to a
Theory of Public Expenditure: The Case of Municipalities, "
National Tax Journal, Vol. 19, September, 1966, pp. 259-275.
Fisher, G. W., "Determinants of State and Local Government Exnendi-
tures: A Preliminary Analysis, " Natio.ia] Tax Journal, Vol. 14,
December, 1961, pp. 349-355.
Gabler, L. R. , "Economies and Diseconomies of Scale in Urban Public
Sectors, " Land Economics, Vol. 45, No. 4, November, 1969,
pp. 425-434.
Harriss, C. L. , "Efficiency in State and Local Government Expendi-
tures, " Annals of the American Academy of Political and Social
Science, Vol. 379, September, 1968, pp. 39-52.
Hufbauer, G. C. , "Environmental Quality, Income Distribution, and
Factor Mobility; The Consequences of Local Action, " Journal of
Economic Issues, Vol. 7, No. 2, June, 1973, pp. 323-325.
Ito, H. , "Self-Government, Local Finance and Democracy, " Public
Finance, Vol. 20, No. 1-2, 1965, pp. 118-133.
MargoHs, J. (ed. ), The Public Economy of Urban Communities,
Baltimore, Maryland, Johns Hopkins Press, 1965.
6.98
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Miller, S. M. , and W. K. Tabb, "A New Look at a Pure Theory of
Local Expenditures, " National Tax Journal, Vol. 26, No. 2,
June, 1973, pp. 161-176.
Prakash, V. , "A Suggested Approach to Municipal Investment Planning, "
Land Economics, Vol. 45, No. 3, August, 1969, pp. 350-358.
Schaller, Howard G. (ed. ), Public Expenditure Decisions in the Urban
Community, Papers presented at a Conference Held in Washing-
ton, D. C. , 1962, Sponsored by the Committee on Urban Eco-
nomics, Washington, D.C., Resources for the Future, 1963.
Shapiro, H. , "Economies of Scale and Local Government Finance, "
Land Economics, Vol. 39, May, 1963, pp. 175-186.
Shoup, D. C. , "Effects of Suboptjmization on Urban Government
Decision Making, " Journal of Finance, Vol. 26, No. 2, May,
1971, pp. 547-564.
Siegel, B. N. , "On the Positive Theory of State and Local Expenditures, '
in Paul L. Kleinsorge (ed. ), Public Finance and Welfare, Essays
in Honor of C. Ward Macy, Eugene, Oregon, University of
Oregon Book, 1966, pp. 171-186.
State and Local Public Facility Needs and Financing, Volume 1: Public
Facility Needs; Volume 2; Public Facility Financing, Studies for
Subcommittee on Economic Progress, Joint Economic Committee,
U. S. 89th Congress, 2nd Session, Washington, D. C. , U. S.
Government Printing Office, 1966.
Stober, W. J. , and Laurence H. Falk, "Evaluating Investment Decis-
ions of State and Local Governments, " Growth and Change,
Vol. 1, No. 4, October, 1970, pp. 38-42.
Thompson, J. E. , "Meeting Unfilled Public Service Needs in Rural
Areas [With Discussion by C. J. Hein], " Journal of Farm Eco-
nomics. Vol. 45, December, 1963, pp. 1140-1149.
Tiebout, C. M. , "A Pure Theory of Local Expenditures, " Journal of
Political Economy, Vol. 64, October, 1956, pp. 416-424.
Weicher, J. C. , "Determinants of Central City Expenditures: Some
Overlooked Factors and Problems, " National Tax Journal,
Vol. 23, No. 4, December, 1970, pp. 379-396.
6.99
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6.3.13 Federalism
Barlow, R. , "Comment on Alternative Federal Policies for Stimulating
State and Local Expenditures, " National Tax Journal, Vol. 22,
No. 2, June, 1969, pp. 282-285.
Beck, Morris, "Towards a Theory of Public Output in Metropolitan
Areas, " Economic Record, Vol. 47, No. 118, June, 1971,
pp. 245-254.
Boehne, E. G. , "The Partial Symmetry of Benefit and Cost Spillovers
and Allocative Efficiency in a Federal System, " Canadian Journal
of Economics, Vol. 2, No. 3, August, 1969-
Breton, A. , "Public Goods and the Stability of Federalism, " Kyklos,
Vol. 23, No. 4, 1970, pp. 882-902.
Breton, Albert, "Theoretical Problems of Federalism, " Recherches
Economiques de Louvain, Vol. 36, No. 2, September, 1970,
pp. 107-116.
Breton, A. , "A Theory of the Demand for Public Goods, " Canadian
Journal of Economics and Political Science, Vol. 32, November,
1966, pp. 455-467.
Buchanan, J. , "Breton and Weldon on Public Goods, " Canadian Journal
of Economics and Political Science, Vol. 33, February, 1967,
pp. 111-115.
Curran, D. J. , "The Metropolitan Problem: Solution from Within?
[Investigation of Public Finances of Localities in Milwaukee
County, Wisconsin]," National Tax Journal, Vol. 16, September,
1963, pp. 213-223.
Downs, A. , "Metropolitan Growth and Future Political Problems, "
Land Economics, Vol. 37, November, 1961, pp. 311-320.
Feiler, M. H. , "Metropolitanization and Land Use Parochialism --
Toward a Judicial Attitude, " Michigan Law Review, Vol. 69,
No. 4, pp. 655-708.
6. 100
-------
Glendenmg, P. N. , "The Federal Role in Regional Planning Councils:
Trends and Implications, " Review of Regional Studies. Vol. 1,
No. 3, Spring, 1971-72, pp. 93-115.
Gramlich, E. M. , "Alternative Federal Policies for Stimulating State
and Local Expenditures: A Comparison of their Effects, " National
Tax Journal, Vol. 21, No. 2, June, 1968, pp. 119-129.
Greenbcrg, M. R. , "Regional vs. Local: Issues in Waste Water Treat-
ment Facility Location, " Growth and Change, Vol. 3, No. 1,
January, 1972, pp. 38-43.
Greene, K. V. , "Some Institutional Considerations in Federal-State
Fiscal Relations, " Public Choice, Vol. 9, Fall, 1970, pp. 1-18.
Haller, H. , "Changes in the Problems of Federative Public Economies, "
German Economic Review, Vol. 8, No. 3, 1970, pp. 177-201.
Hirsch, Werner Z,, "Expenditure Implications of Metropolitan Growth
and Consolidation, " Review of Economics and Statistics, Vol. 41,
August, 1959, pp. 232-241.
Hirsch, W. Z. , "Expenditure Implications of Metropolitan Consolida-
tion Revisited, " Review of Economics and Statistics, Vol. 44,
August, 1962, pp. 344-346.
Hirsch, W. Z. , and M. J. Marcus, "Intercommunity Spillovers and the
Provision of Public Education, " Kyklos, Vol. 22, No. 4, 1969,
pp. 641-659.
Hirsch, W. Z. , "Local Versus Areawide Urban Government Services, "
National Tax Journal, Vol. 17, December, 1964, pp. 331-339.
Hirsch, W. Z. , "Regional Information Design for Public Decisions, "
Review of Income and Wealth, Vol. 15, No. 4, 19&9, pp. 369-380.
Ingram, H. M. , "The Political Economy of Regional Water Institutions, "
American Journal of Agricultural Economics, Vol. 55, No. 1,
February, 1973, pp. 10-18.
Kirkpatrick, S. A. , and D. R. Morgan, "Policy Support and Orienta-
tions Toward Metropolitan Political Integration Among Urban
Officials, Social Science Quarterly, Vol. 52, No. 3, December,
1971, pp. 656-671.
6, 101
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Koleda, Michael S. , "A Public Good Model of Governmental Consolida-
tion, " Urban._Studjes, Vol. VIII, No. 2, June, 1971, pp. 103-110.
Leiken, L. S. , "Governmental Schemes for the Metropolis and the
Implementation of Metropolitan Change, " Journal of Urban Law,
Vol. 49, No. 4, May, 1972, PP. 667-687.
Marshall, H. E. , "Economic Efficiency Implications of Federal-Local
Cost Sharing in Water Resource Development, " Water Resources
Research, Vol. 6, No. 3, June, 1970, pp. 673-68?..
Medeiros, J. A. , "The Federal Role in Regional Planning Councils:
Trends and Implications: Comment, " Review of Regional Studies,
Vol. 1, No. 3, Spring, 1971-72, pp. 117-119.
Mueller, D. C. , "Fiscal Federalism in a Constitutional Democracy, "
Public Policy, Vol. 19, No. 4, Fall, 1971, pp. 567-593.
Musgrave, R. A. , "Theories of Fiscal Federalism, " Public Finance,
Vol. 24, No. 4, 1969, pp. 521-536.
Mushkin, S. J. , and R. F. Adams, "Emerging Patterns of Federalism,"
National Tax Journal, Vol. 19, September, 1966, pp. 225-247.
Neumann, M. , "On the Economic Theory of Federalism, " German
Economic Review, Vol. 10, No. 1, 1972, pp. 1-13.
Ng, Yew-Kwang, "Public Goods and the Stability of Federalism: An
Extension. " Kyklos, Vol. 24, No. 3, 1971, pp. 562-563.
Olson, M., Jr., "Strategic Policy and Its Application, The Principle
of 'Fiscal Equivalence:1 The Division of Responsibility Among
Different Levels of Government, " American Economic Review,
Vol. 59, No. 2, May, 1969, pp. 479-487.
Ostrom, E. , "Metropolitan Reform: Propositions Derived from Two
Traditions. " Social Science Quarterly, Vol. 53, No. 3, December,
1972, pp. 474-493.
Ostrom, V. , "Operational Federalism: Organization for the Provision
of Public Services in the American Federal System, " Public
Choice. Vol. 6, Spring, 1969, pp. 1-17.
6.102
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Poulsen, R. G. , "Central City Land Use and Suburban Financial Sup-
port, " Land Economics, Vol. 46, No. 4, November, 1970,
pp. 497-502.
Reeves, M. W! . , "Observations on the Federal Role in Regional Plan-
ning Councils: Comment s, " Review of Regional 5tucHcs_. Vol. 1,
No. 3, Spring, 1971-1972, pp. 121-122.
Rensliaw, E. F. , "Expenditure Implications of Metropolitan Growth
and Consolidation: A Comment, " iIe vie\\•• of JOc<-1• omi.cs and Sta_-
tistics, Vol. 43, February, 196], pp. 93-94.
Ross, M., "Procedures for Integrated Regional Planning. I: The Back-
ground to Decentralisation, " Kconomic a 17 d _ S o c i a 1 R e v i e\v, Vol. 4,
No. 4, July, 1973, pp. 523-542.
Rothenbosrg, J . , "Strategic Theory and Its Applications, Strategic Inter-
action and Resource Allocation in Metropolitan Intergovernmental
Relations, " American Economic Review, Vol. 59, No. 2, May,
1969, pp. 495-503.
Sandier. T. M. . and R. 13. Shelton, "Fiscal Federalism, Spillovers..
and the Export of Taxes, " Kyklos, Vol. 25, No. 4, 1972,
pp. 736-753.
Tiebout, C. M. , "Economies of Scale and Metropolitan Governments, "
Review of Economics and Statistics, Vol. 42, November, I960,
pp. 442-444.
Tullock, G., "Federalism: Problems of Scale, " Public Choice, Vol. 6,
Spring, 1969, pp. 19-30.
Weltlon, J. C. , "Public Goods (and Federalism) ["With A. Breton's
Reply], " Canadian Journal of Economics and Political Science,
Vol. 32, May, 1966, pp. 230-242.
Wheeler, R. I-I. , "Annexation Law and Annexation Success, " Land
Economics, Vol. 41, November, 1965, pp. 354-360.
Zimmerman, J. F. , "Metropolitan Ecumenism: The Road to the
Promised Land9" Journal of Urban Law, Vol. 44, No. 3, Spring,
1967, pp. 433-457.
6. 103
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TECHNICAL REPORT DATA
(Please read Inunctions on the reverse before com/tleling}
1. REPORT NO.
EPA-600/5-77-001
3. RECIPIENT'S ACCESSION NO.
4. TITLE AND SUBTITLE
Economic Incentives for Land Use Control
5. REPORT DATE
February 1977 issuing date
6. PERFORMING ORGANIZATION CODE
7. AUTHOR(S)
Frederick H. Rueter, Phillip Kushner
8. PERFORMING ORGANIZATION REPORT NO
9. PERFORMING ORGANIZATION NAME AND ADDRESS
CONSAD Research Corporation
121 North Highland Avenue
Pittsburgh, Pennsylvania 15206
10. PROGRAM ELEMENT NO.
1 HC 619
11. CONTRACT/GRANT NO.
68-01-2699
12. SPONSORING AGENCY NAME AND ADDRESS
Office of Air Land and Water Use
Office of Research and Development
U.S. Environmental Protection Agency
Washington, DC 20460
13. TYPE OF REPORT AND PERIOD COVERED
Final
14. SPONSORING AGENCY CODE
EPA/600/16
15. SUPPLEMENTARY NOTES
16. ABSTRACT
This report performs a theoretical economic analysis of the incentives embodied
within a variety of existing and proposed land use control techniques and, then,
employs this analytical framework to examine the social desirability of supplementing
or replacing the existing body of land use control mechanisms with any of several
innovative policies for the regulation of the use of land. Thus, this report first
investigates the economic and legal relationships between alternative assignments
of property rights in the use of resources and the levels of external effects
attributable to the use of these resources. Then, the administrative, legal,
economic, and political limitations of the traditional land use control mechanisms
of municipal zoning, subdivision regulation, building codes, and eminent domain
condemnation are examined. Next, a set of basic concepts is developed for the
evaluation of the potential economic efficiency and social desirability of any
mechanism for the optimal control of external effects or1 the optimal provision of
public facilities. Finally, using these concepts, the potential economic efficiency,
legal feasibility, administrative tractability, political acceptability, and social
desirability of implementing several innovative and, as yet, relatively untried land
use control mechanisms are assessed. Bibliography and literature survey.
KEY WORDS AND DOCUMENT ANALYSIS
DESCRIPTORS
b. IDENTIFIERS/OPEN ENDED TERMS C. COSATI l-'icld/Grollp
Economic Analysis, Planning, Land Use,
Regional Planning, Public Administration,
Administrative Law, Public Law
Environmental Management
Economic Externalities,
Property Rights
05A
Behavioral and
Social Sciences/
Administration
and Management
3. DISTRIBUTION STATEMENT
Release to public
19. SECURITY CLASS (ThisReport)
Unclassified
21. NO. OF PAGES
369
20. SECURITY CLASS (Thispage/
Unclassified
22. PRICE
EPA Form 2220-1 (9-73)
7.0
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