Urban Growth Externalities and Neighborhood Incentives: Another Cause of Urban Sprawl?

This paper suggests a cause of low density in urban development or urban sprawl that has not been given much attention in the literature. There have been a number of arguments put forward for market failures that may account for urban sprawl, including incomplete pricing of infrstructure, environmental externalities, and unpriced congestion. The problem analyzed here is that urban growth creates bene…ts for an entire urban area, but the costs of growth are borne by individual neighborhoods. An externality problem arises because existing residents perceive the costs associated with the new residents locating in their neighborhoods, but not the full bene…ts of new entrants which accrue to the city as a whole. The result is that existing residents have an incentive to block new residents to their neighborhoods, resulting in cities that are less dense than is optimal, or too sprawling. The paper models several di¤erent types of urban growth, and examines the optimal and local choice outcomes under each type. In the …rst model, population growth is endogenous and the physical limits of the city are …xed. The second model examines the case in which population growth in the region is given, but the city boundary is allowed to vary. We show that in both cases the city will tend to be larger and less dense than is optimal. In each, we examine the sensitivity of the model to the number of neighborhoods and to the size of infrastructure and transportation costs. Finally, we examine optimal subsidies and see how they compare to current policies such as impact fees on new development. Keywords: Externalities, Urban Growth, Optimality, Policies, Taxation. JEL classi…cation Numbers: H23, R11, D60, R28, H2 Matthias Cinyabuguma and Virginia McConnell are Assistant Professor and Professor of Economics at UMBC, Economics Department. Please, address questions and comments to [email protected]. We thank Ted McConnell, Paul Gottlieb and Arthur O’Sullivan and participants at the American Economics Association meeting, 2009, and at the Regional Science Association International meeting, 2008, for valuable comments.