Land Markets and their Regulation: The Welfare Economics of Planning

Whether called ‘planning’ or ‘zoning’, land markets are regulated in many cities and countries over the world. These interventions ensure the provision of certain amenities but researchers are increasingly becoming aware of the repercussions they have in land and housing markets, as well as in other segments of the economy. This chapter introduces welfare economics – though not an approach widespread in the planning community – as a framework for the evaluation of land use policies. We discuss the conditions under which markets may be expected to deliver a socially desirable outcome if left to themselves, and identify various sources of market failure in land markets that may call for regulation. Stylised models are used to illustrate the form and extent of optimal interventions, classifying their impacts into costs and benefits for society. A substantial body of empirical evidence on the impacts of land use regulation is surveyed. Although estimates of net welfare effects are scarce, the few existing studies suggest that costs may exceed benefits by a significant margin. We conclude with a brief discussion of wider economic impacts.