How Land Prices Obviate the Need for Euclidean Zoning

Yesterday, Reason TV released a video comparing Houston with more heavily regulated East Coast cities, explaining that Houston’s relatively lax land use regulations contribute to its housing costs that are much lower than in other large cities. While the video paints an exaggerated picture of Houston as a free market paradise in spite of its codified sprawl, Todd Krainin makes some great points about Houston’s land use tolerance. For example, the city’s tin houses that save on construction and energy costs would be illegal in many cities that have tighter restrictions on building codes.

In the video, the former mayor of Victoria, TX makes the great point that in spite of the absence of Euclidean Zoning in some Texas cities, residents don’t need to worry about heavy industry cropping up in their neighborhoods. “Economics dictates that you’re not going to put a rendering plant next to a residential subdivision,” he says. He’s referring to rent gradients that lead to land near amenities being priced at higher rates than land farther from amenities. Owners of low-value land uses don’t choose to pay high prices to be near these amenities. While there are occasionally legitimate nuisance cases in which housing and industrial uses impose externalities on each other because of their proximity, in a free market these cases would be very rare because it doesn’t make sense for industrial uses to take place on the land that people are willing to pay premium prices to live on.

While city planners make the case for Euclidean zoning by saying that they are protecting residents from living near industry, zoning often results in the exact opposite outcome. Valuable property in cities including New York and San Francisco that is zoned industrial gets surrounded by residential neighborhoods over time as the city grows. Planners’ inability to keep codes up to date with evolving cities means regulations require industrial uses adjacent to residential ones, mandating inefficient land use and creating industrial blight near homes. In Washington, DC, recent rezoning of industrial uses near Union Station and Navy Yard has created rapid fire gentrification. Without zoning, industrial uses would have gradually move from these valuable sites, allowing for housing and retail to enter these neighborhoods slowly allowing for filtering prices over time.

In Bushwick, warehouses abut apartment buildings. Image via Real Estate Weekly.

In Los Angeles, the problem of cementing the location of industrial uses has reached an extreme. Torrance, CA, a city where the median home sells for over $600,000, is home to an oil refinery, located about two and a half miles from the coast. A few miles northwest in El Segundo, where the median home is worth $860,000, a Chevron refinery occupies 1,000 acres of beachfront property. This isn’t because these companies enjoys refining oil surrounded by residential neighborhoods or find it particularly profitable to do so, but rather because its unlikely that they could ever receive the necessary approvals to open a new refinery elsewhere.

In some cases, such as developing world mega cities, it’s more likely that industrial uses would locate adjacent to housing than it is in the United States because of different transportation systems. In these cases, people with progressive attitudes might argue that zoning would protect residents of cities like Karachi, and Lagos from living near polluting industry. But even in these cases, using zoning to prevent the market from allocating land use is likely to hurt cities’ most disadvantaged residents rather than making them better off.

True, developing world residents accept risks when they live near factories, including the small potential for a catastrophe such as a factory fire in a residential neighborhood. However everyone accepts risk in their daily lives in their efforts to make a living and pursue happiness. Those with low-incomes in the U.S. and even more so in the developing world accept greater risks than those with higher incomes because risk reduction is a normal good whose demand rises with income. Individuals must make risk-risk tradeoffs in their lives, including the decision to live near a factory in exchange for shortening a difficult and dangerous commutes or in turn for saving money on housing to have more resources for other essentials.

In the United States, legally separating industrial uses from residential land uses at time zero is unlikely to result in a significant change from a market outcome because owners of industrial property will want to locate on cheap land far from where people live. In those cases where industry and residents choose to locate next to each other, it’s worth considering that the people involved are making the best choices given their circumstances. Given that cities grow and evolve, it’s likely that industrial-zoned land will end up adjacent to higher value uses, leading regulations to achieve the opposite of their intent. In those rare cases when economics do not naturally separate residential from noxious uses, the court system is well-equipped to mediate cases as they arise.