Friday, January 22, 2016

Lehavi on Zoning and Market Externalities

LehaviAmnon Lehavi (ICH - Radzyner) has posted Zoning and Market Externalities on SSRN.  Here's the abstract:

The regulation of land use is considered one of the key powers of local governments since zoning was introduced in the United States a century ago, but the scope of this power and the nature of its underlying theory are still far from settled. The control of incompatible uses and other types of environmental externalities has been established as a quintessential feature of zoning. This is also the case with regulating fiscal externalities, according to which private developers must account for increased public expenditures.

What remains largely obscure, however, is the legitimacy of local governments in regulating pecuniary externalities and other types of private economic activities that have an aggregate effect on the real estate market -- defined here as “market externalities.” May zoning decisions limit the scope of new commercial uses, such as shopping malls, if the city believes that there is already an excess supply of them; or constrain the entry of big-box retailers to preserve the economic viability of a downtown business district? Can a land use ordinance limit, or entirely prohibit, the renting out of housing units in a certain neighborhood, to keep out investors who might drive up real estate prices? Is government entitled to require a developer of market-rate properties to pay a mitigation fee to finance affordable housing units -- under a theory that the project would generate new demand for local services provided by modest-income workers who are in need of housing solutions?

This Article develops an innovative theory of zoning and market externalities. It argues that the zoning power should generally extend to regulate market externalities -- provided that such decisions are based on a general land use policy that can be clearly identified, and are not tailored to merely block, or legitimize, a specific project.

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