1. Land Use Planning Tools Lecture 3: Economics of Zoning
Adapted from Arthur O’Sullivan, Urban Economics, chapters 10 (5th edition) and from Bill Fulton’s Guide to California Planning
Notes by Austin Troy
Land Use Planning Tools Lecture 3: Economics of Zoning

2. Land Use Controls Are designed to address market failures
Frequently conditions for “perfect market are not met”
Many buyers and sellers, ability to exclude, homogeneous products, costless entry and exit in markets, perfect information, inputs and outputs fully divisible, full internalization of consequences of production and consumption, constant returns to scale

3. Land use controls correct for
Negative externalities
External benefits
Public goods
Services with big scale economies (natural monopoly)
Merit goods
Equity and distribution
We’ll talk about these next week

4. Four cornerstones of regulation
Comprehensive plans (see Burlington MDP)
Subdivision ordinances
Capital improvement planning
Zoning
We’ll focus on the last mainly

5. History of Zoning Earliest zoning laws were segregationist
New York (1916) zoning law—5th avenue retail businesses wanted to limit garment workers; law limited growth of office buildings and garment factories; ostensibly to reduce negative effects of tall buildings
San Francisco- zoned out laundries from certain neighborhoods, which happened mostly to be owned by Chinese.
Later zoning became a means for growth management: keep new development in line with available facilities

6. Major Federal Zoning Laws
Standard State Zoning Enabling Act of 1922
Sanctioned dividing of land into zones by local governments, with uniform codes for each
City Planning Enabling Act of 1928.
Created model ordinance of the general plan process, including recommended powers of planning commissions
These laid out model ordinances, but did not make any requirements

7. State Response to Federal Laws
In response, many states passed their own enabling legislation confirming local police powers
Many states also passed comprehensive planning laws, requiring local comprehensive plans
Problem in early years: planning and zoning were often not coordinated, with different people doing each

8. Euclid v. Ambler 1926
Supreme Court case on validity of local police power for zoning
Euclid was a small commuter suburb that wanted to forestall encroachment of Cleveland’s industry
Ambler owned real estate, mostly zoned industrial/commercial, but some was zoned residential .
Ambler claimed a taking without due process.
Court upheld city’s right to zone based on two criteria: legitimate public interest and due process

9. What exactly is zoning?
Purposes: 1) limit overcrowding/ overbuilding relative to public services and facilities, 2) ‘stabilization’ of neighborhoods, 3)segregating incompatible land uses
Types: nuisance zoning, fiscal zoning, design zoning
Tools: ordinance and map (see Burlington’s map)
Players: Elected officials, planning commission, development review board, Zoning staff

10. Burlington example Dev. Review Board DPZ Staff Planning Environmental
projects
Dev. Review
Board
DPZ Staff
Review
Major projects
and appeals
to small projects
Comments on
and approves
ordinance
Planning
Comm.
Writes
ordinance
Environmental
Court
City Council
major
appeals

11. What does zoning regulate?
Use: activities permitted within zone
Bulk: envelope in which building must fit—specified through setbacks, building coverage, building heights, floor area ratio (ratio of building to lot square footage)
Performance/impact: performance standards, or impacts a building is allowed to produce; biggest example is parking spaces

12. Nuisance Zoning
Classic example: used to separate heavy industry and residential zones to protect against externalities (noise, smell, pollution)
Separation is most simplistic way of dealing with external effects of industry
Problems:
Doesn’t reduce these effects—just moves them around
Spillover: an industrial zone may be far from residents in the municipality to which it belongs, but close to residents over the border

13. Zoning Tools:designation
Zone designation/changes: geographic designation of what places are in what zone
Generally requires legislative approval and public hearing at local level
Spot zoning: grants one parcel of land a zoning different from rest of a neighborhood
Strengthening of general plans in many states makes it harder to manipulate zones because change must be consistent with GP

14. Zoning tools:variances
Variances: gives landowner an exception to break some zoning rules in a zone.
Use variances: permits otherwise unacceptable use without change of zone
Variance from standards: allows use that doesn’t meet standards that others must meet
Ostensibly for “hardship” exemption: if some feature of land makes it impossible to make use of it under existing zoning (e.g. big boulder)
Courts are divided as to what is “hardship”

15. Variances and planning
Variances are often used as a development tool, to get around established policies
Variances circumvent government decision making process and vests quasi-judicial powers in planning body because it is construed as administrative and not policy
Insidious way of shielding policy decision from public input and debate; it is really a disguised zoning change without the legislative approval

16. Zoning tools: discretionary review
Attaches conditions to certain uses to make sure uses in a zone are compatible
Based on conditional use permitting: triggers planning or design commission review of project
Generally requires some public input
Used to get more leverage over developers
Sometimes “conditions” of use are really more like exactions

17. Other zoning terms Non-conforming uses Inclusionary zoning
Density bonuses
Planned Unit Developments
Separate zoning ordinance written for one specific development; standards appropriate to that particular project
Often used interchangeably with “specific plan,” which is both a planning and implementation tool

18. Two big problem with zoning
Takings
Exclusionary or fiscal zoning

19. Takings question
There were many complaints and lawsuits in the initial period
Argument was that zoning favored some landowners over others, hence not equal protection under the law
Also, just compensation argument, claimed that zoning violated Fifth Amendment, which prohibits “taking” by the government without just compensation

20. Takings question: three cases
Nollan vs. California Coastal Commission, 1987: Supreme Court ruled that Commission did not establish link between restriction and public interest in beach access case
Lucas vs. South Carolina 1992: Supreme Court said taking occurred, damages due to plaintiff because beachfront development regs denied owner of ALL value on property; hence must leave some value.
First English Evangelical Lutheran Church vs. County of Los Angeles 1987:Property owner whose land was taken by regulation is entitled to just compensation

21. Fiscal/exclusionary zoning
Used to exclude households that impose financial burden on city, i.e. tax burden less than services consumed.
This is often the case for high density households, households on the fringe and new commercial/industrial development
Dense housing contributes less in property tax because housing is worth less
Exclusionary tools: setbacks, min lot size

22. Backlash against exclusionary zoning
South Burlington County NAACP vs. Mount Laurel (1975 and 1983) court rulings were two landmark cases in exclusionary zoning
The first case contended that the large lot zoning policy of Mt. Laurel zoned out poor
Court agreed and said towns had “presumtive obligation” to zone and plan for housing accommodating variety of income groups

23. Results of Mt. Laurel
Towns in NJ rewrote ordinances , but only had appearance of complying with ruling
1983 ruling issued specific rules about how towns should be providing affordable housing; 20% of units must be for low and moderate income people—empowered a body to oversee
Has not been repeated in many other states

24. Later zoning developments
Citizen participation requirements for planning (prop 20, CEQA)
Performance zoning
Inclusionary zoning
Transfer of development rights
Adequate facilities ordinances
Impact fees

25. Performance zoning
Intermediate approach; it gives lower impact firms more options in location
This is often used for retailers or large apartment buildings to reduce their impacts on mixed-used residential neighborhoods
E.g. requiring parking spaces to reduce off-street parking, noise control, landscaping, street improvements to offset congestion.

26. Inclusionary zoning
Developers get a density or parking bonus, or fast tracking in return for setting aside a certain portion of units in a development as “affordable” or below-market price.
Affordability defined often as less than 1/3 of income of someone earning somewhere between 50 and 80% of median income
Usually the affordability clause gets passed on with the title to the house, or included as a deed restriction

27. Adequate facilities ordinances
Existence of adequate facilities (e.g. sewer, fire, water, roads, schools) becomes pre-condition for development approval
Often requires complex modeling to determine capacities and impacts
Report details where facilities are ready and where development must wait
Problem: what is adequate? Hard to monitor and assess consumer demand; hard to assess capacities and marginal impacts; always changing;
See Montgomery County, MD

28. Transfer of Development Rights
“Macro-architecture.”
Example: 50 acres vacant land, 25 N and 25 S
City wants to have 500 new households
Initially, both areas are zoned for 10 units/acre
Policy alternative: zone south for 20 units per acre= 500 units; zone north for open space
Southern landowners gain at the expense of northern, because N land is nearly worthless

29. Transfer of Development Rights
Instead city could establish a development zone (south) and preservation zone (north)
The south owner can develop 10/acre in the south. The north owner cannot develop on their land but has development coupons worth 250 units, which can be used to override zoning restrictions in south.
Then south owner can buy the coupons at market rate to put in denser development
This helps compensate north owner for reduction of market value of land

30. Impact fees
In fringe land, property tax revenue of new housing may be less than cost of services.
This puts a burden on non-fringe residents
Policy options:
Zone vacant land agricultural
Impose a tax surcharge for new development
Levy a one-time impact fee

31. Impact fees
Developer compensates local gov’t for fiscal burden of new development in terms of increased service use
If market is competitive and developer makes zero profit, cost is passed on to homebuyers, through higher housing prices, and to landowners, through lower land price
Often imposed for water, sewer, roads, parks, fire
Pricing of fees regulates type and magnitude of development

32. A market alternative to zoning: effluent fees
An approach that deal with those problems is to “internalize” the costs of externalities—that hidden costs to society—using effluent fees
Fee should equal marginal social cost; if it does, then have efficient pollution level; firms reduce their pollution output based on fee, until optimal

33. Effluent Fees
A spatial system of fees should also generate optimum spatial distribution of external effects
As move closer to houses, marginal external cost increases, and so fees do too
Therefore firm chooses location that minimizes their pollution impact relative to the added transportation costs for workers

34. Effluent fee example Assume
residents live in west side, commute to east to polluting mill
The longer the commute distance, the higher the wage, because of compensation for commuting cost
The further from the mill, the lower the effluent fee for the factory
Initial state: zoning policy where mill is 10 miles from residential area

35. Optimum location for mill
Cost minimizing location;
Pollution cost= effluent fee
Total cost
Labor cost
cost
$53
Firm will locate here
Pollution cost
4.2
Distance from residential area

36. Effects of effluent fee
Mill moves from 10 miles to 4.2 miles
It moves there because their labor costs are too high if they are farther away than 4.2 miles and their effluent fee gets to high if they move any closer.
So under zoning, they were inefficiently far from the residential area.
Firm will stay far out if pollution cost curve is steeper than the labor cost curve.

37. Why effluent fees are rarely used
Setting effluent fees in complex because must estimate marginal social cost for different locations in city and must monitor pollution/externalities
Effluent fees may result in increased pollution in some neighborhoods
Zoning is simpler